5 ways to embrace risk in philanthropy for more impact and greater fulfillment
Over the past few years, a variety of leaders in philanthropy have been calling for funders to embrace more risk in their giving. And while I agree that philanthropists need to embrace practices that are currently deemed to be “risky,” I’d like to challenge why we think of these ideas as risky in the first place—and what actually happens when we try to engineer risk out of our giving.
The way we typically think about risk in philanthropy often comes from a fundamental misunderstanding of the kind of problems we are trying to solve.
Any problem can be classified into one of the following categories:
- A simple problem has a linear structure. Every time we do A, we get B as a result. If you’re faithful to do A in the exact same way each time, you will always get B, and there’s very little risk that you won’t create the desired outcome.
- A complicated problem is a series of simple problems that still have linear causal relationships. If A, then B, then C. If any one of those inputs has an error, the whole thing fails. For example, putting a satellite into orbit is a complicated problem. It takes precise calculations, but you can reliably predict and design for all the risks.
- A complex problem is one that doesn’t have a linear relationship between the cause and the effect. To achieve a desired outcome, you have to bring a flexible, constantly adapting solution, because the conditions surrounding the problem are constantly changing.
A great many of the problems that philanthropists seek to solve are, in fact, complex problems, but we tend to approach them as if they’re simple or complicated problems.
In philanthropy, we often tackle issues like chronic homelessness, education inequality, or climate change in the same way NASA approaches putting a satellite into orbit. We put quality control measures and cross-checks into every step of the philanthropic process. We attempt to engineer risk of failure out of the equation in order to achieve a guaranteed outcome.
The problem is when we take those mindsets and apply them to complex social challenges, we actually introduce more risk of failure into our approach, because we’re not sufficiently flexible and adaptive.
So with that understanding of risk in mind, let’s look at some of the ways that philanthropists can embrace practices that would be seen as “risky” in an approach to a complicated or simple problem, but can actually lead to greater impact in the face of complexity—and can help put the fun back into giving.
1. Engage in trust-based philanthropy
The philanthropy world is beginning to wake up to the idea that all of the checks and balances that we have come to see as normal in philanthropy actually just reinforce power imbalances between foundations and nonprofits.
That’s why there is now a movement toward trust-based philanthropy, which involves streamlining grant applications and reporting requirements, giving out multi-year unrestricted funding, and building relationships based on mutual trust between funders and grantees.
In my opinion, this movement is long overdue.
When we put metrics and milestones on our grants with social entrepreneurs, we’re often introducing more risk—rather than reducing risk—because we’re making it harder for grantees to iterate and experiment and be real with us. We’re treating the problem as a simple or a complicated issue, when it’s actually complex.
Instead of asking social entrepreneurs to spend all kinds of time assessing and reporting on their use of our funds, based on pre-established metrics that likely have minimal connection to their actual effectiveness, we should focus on long-term outcomes. Funders should build trust-based relationships with the social entrepreneurs they fund, and be in conversation with them on a regular basis. Informal conversations will often give you a much better sense of how their project is going, what pivots they are making, and what additional support they need.
2. Support early-stage entrepreneurs
When you’re trying to solve complex problems, you need to be ready to adapt and change your approach at a moment’s notice. And to avoid overcorrecting, or missing the window of opportunity, you need to have the adaptation happen as close to the problem as possible. That’s why I believe it’s so important that philanthropists focus on backing the people who have proximity, passion, and expertise with a problem—the social entrepreneurs who have dedicated their lives to solving complex problems. Those individuals will notice when their approach isn’t working, make adjustments on the spot, and continue to iterate and experiment as the situation changes.
I would love to see more philanthropists follow the example of Schmidt Futures. They have one of the 10 largest philanthropic endowments in the world, and their whole premise is about backing extraordinary leaders who are dedicated to making the world better. They make bets on undiscovered, unproven social entrepreneurs, aiming to be one of the first major donors behind that individual’s work. Without that initial vote of confidence, those leaders might never be able to gain access to the resources needed to achieve the impact they are uniquely capable of making.
Is it risky to back unproven entrepreneurs? From the perspective of achieving a specific outcome, sure. There’s a risk that the entrepreneur you back doesn’t have the experience needed to pull something off. Or maybe they’ll end up being a super charismatic person who can’t follow through. But in either case, you and the entrepreneur will learn from those experiences, and you’ll be able to adapt your approach going forward. But when you do fund a gifted individual with the proximity, passion, and commitment to making change, the payoff is huge—especially if they are not saddled with unnecessary reporting requirements.
3. Directly fund research and development
Some philanthropists hesitate to fund research and development activities because they’re afraid that the discovery they’re hoping for won’t pan out. And it might not, especially in the short run. But in the long run, philanthropy that supports knowledge discovery has the inherent potential for a great deal of leverage.
For a great example of an incredible payoff in terms of impact, look at efforts by many foundations—the Bill and Melinda Gates Foundation being a notable one—to develop a vaccine for malaria. That research focused on an innovative approach to vaccines using RNA instead of dead samples of the disease agent. The malaria vaccine hasn’t yet panned out, but the research ended up contributing to the speedy development of a whole class of COVID-19 vaccines.
Funding research and development may not yield the exact result you’re hoping for within a set time span, but it helps to add to the store of human knowledge that others can build on. Once a discovery has been made, it can be leveraged in incredible ways you can’t predict.
4. Prioritize impact as well as rate-of-return with your invested foundation assets
When foundations set themselves up to last in perpetuity—only distributing the required 5 percent of their assets each year—they often leave the other 95 percent in traditional investments, hoping to get an 8+ percent rate of return to beat inflation and ensure that their giving capacity doesn’t diminish from year to year.
But by focusing solely on their rate of return, they often end up investing 95 percent of their assets in things that have nothing to do with their mission, or worse, may even run counter to their mission.
Whatever your vision for making change, chances are it really isn’t true that you have to sacrifice rate of return in order to make mission-aligned investments in the market. Impact-focused investing has been around for many years, with proven results.
Working with investment advisors who are willing to think about your mission and invest accordingly may mean leaving the investment firm that makes you feel safe—but you don’t have to do it all at once. Start small. Maybe take 10% of your corpus and put it with someone else, and see if you can’t get just as good a rate of return while also creating a positive social impact that’s aligned with your philanthropic vision, and then gradually keep moving your assets.
5. Consider giving in less tax-advantaged ways to maximize the autonomy of the recipient
It’s deeply ingrained in philanthropy that you should give in a way that minimizes the amount of money the government takes in taxes.
It comes from an assumption widely present among philanthropists that it would be irresponsible and wasteful not to take full advantage of every provision of the tax code so as to minimize our tax obligation and maximize the resources we have available for philanthropy. We go to great lengths to structure our giving for maximum “tax efficiency.” ”I’d like to challenge the notion that “tax inefficiency” in our giving is such an unpardonable sin.
Why are we so worried about what the government gets? Governments don’t waste 100% of the funds they get—look at the roads you drive on or the unemployment checks that sustained many families during the pandemic.
When we say a certain type of giving is “not allowed” or “not permissible,” what we almost always mean is that you won’t be able to take a tax deduction for it. It’s not actually illegal, but our language frames this kind of giving as if it’s simply not possible.
When funders start their giving process by meeting with tax professionals, they end up severely limiting their options when it comes to how they can give—and often they don’t even realize the tradeoff they’ve made. For example, if you put all the resources you intend to give away into a donor advised fund or a family foundation at the advice of your tax planner, you’ve given up the opportunity to use any of these resources for certain kinds of advocacy and political engagement that might be incredibly impactful on the issues you care most about.
Likewise, if you actually want to transfer true ownership of an asset to another individual, under our current laws, you’re going to pay a tax on it. But you’re also going to potentially accomplish something amazing. Direct wealth transfer is by far the easiest way to give away your money. And more importantly, direct giving gives recipients the most freedom to decide what to do with the money—creating an amazing runway for gifted change agents.
What’s your version of the MacArthur prize on steroids? Which incredibly gifted change agents with proximity, passion, proof and promise could you get behind in a radically big way? The idea here is that you don’t simply give these entrepreneurs huge levels of grant support, but rather you transfer wealth to them on a truly significant scale. Imagine if some of the signatories to the Giving Pledge created 10 $1 billion LLC’s and handed control of these vehicles to 10 MacArthur-style geniuses with proximity and dedication to addressing the needs of their communities? The simplest way to do this would be for the donor to pay taxes on the amount transferred so that the recipient would end up with something like 60 to 80 percent of the original capital. The recipient would then be entirely free to deploy these resources to make change as they saw fit, with no constraints on using these dollars for solely “charitable” purposes.
I’m not advocating that funders never consider tax efficiency in their giving, but I’d love to see funders explore more creative options that they might have otherwise dismissed because of the tax implications.
Putting the fun back into funding
Embracing risk in any of the ways outlined here will fundamentally transform philanthropy—and the lives of the social entrepreneurs who are on the front lines.
And by focusing on relationships, making bolder bets, and letting go of the illusion of control when dealing with complexity, embracing risk can also bring a little bit of the fun back into giving, leading to greater personal fulfillment for funders.