Is Risk Aversion Killing Innovation?

Posted by Laura Otten, Ph.D., Director on September 20th, 2012 in Thoughts & Commentary

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There are many things that I like about the nonprofit sector.  One of them, however, is not the fact that, by and large, it is risk averse.  This must change if we want to survive and be the sector that people expect us to be—the sector that solves the problems of communities and individuals, that enriches all of our lives, and that, in so many ways, does the work that many don’t want to do.

If we continue simply to do the “same ole, same ole,” the many new hybrid structures that theoretically, allow for doing good while making good money will run us over and “win the race.”  (Mark Zuckerberg, in a recent speech, referred to Facebook as a “mission-driven company,” suggesting, oh, don’t be ridiculous!  Salesforce has backed off, thanks to great pressure to do so, from trying to trademark “social enterprise.”  Seriously?)

It is yet to be proven whether doing good and making sufficient profit to keep investors satisfied is a sustainable model for solving society’s problems and addressing all of its needs; we do, however, know that doing good and making enough profit to reinvest in mission is sustainable—or at least it has been a sustainable model.

In part, our aversion to taking risk is easily understood.  Most, if not all, of the risks that a nonprofit would need to take—starting a new program, expanding to serve a new population, building a new facility, hiring a new staff person for a not yet fully-sourced position, rebranding—require money.  All too often, that money is donated to the organization as a result of some very hard work on the part of a good number of staff and volunteers.  And even though that money is donated for unrestricted purposes, or the restricted purpose of that risky behavior, there is no message “on the package” that says, “Caution:  your gift may end up supporting a program that does not achieve its intended outcomes, despite our best planning and best effort; but the good news is  we will have tried something new.  On the other hand, there is the chance that the program will be highly successful.”   But don’t we all know that there is a chance of failure?  Of course we do!  But the fear for nonprofits is that a failure will mean future loss of a donor’s money.  And that risk appears too great for most nonprofits to take.

But why?  The cautionary message above is, after all, the same pitch, explicit or implicit, that is made to venture capitalists being urged to invest in a new overtly, for-profit business venture:  “Give us your money; we may or may not be able to earn you a great return.  But if not, we will have tried.”  For-profit companies don’t hesitate to make the ask and accept the money of their donors; so, why do we?  For-profit companies aren’t reluctant to ask people to invest in a risk; so, why are we?

Is it simply that nonprofits are afraid to take the chance and ask?  Or is trying something truly brand new (for them) simply too big a risk?  I don’t often come across nonprofit boards willing to have a conversation on the topic of calculated risk.  This despite the fact that more and more members of nonprofit boards come from the business world where calculated risk is frequently discussed, levels of risk calculated and decisions made as to where on the scale of risk tolerance should the company (relatively) safely put down anchor.  Not happening in the nonprofit sector.  It seems, increasingly, that the comparison that was routinely made—that small entrepreneurial businesses are more like nonprofits than they are like larger for-profits—no longer holds water.  With the exception of the risk involved in starting a business or nonprofit, the two seem to be parting ways.

To a great extent, and increasingly so, funders must take a good size share of nonprofits’ fear of risk-taking.  It is ironic that in this era where innovation (a term with no shared definition in the world of nonprofits—be it philanthropists or service providers) is the new philanthropic trend—where donors want to see new ideas, new ways of solving old problems—too many of these same philanthropists are demanding measurable proof of success from the outset.

“Before you even start, nonprofit, tell us how you will measure (read:  make your best educated guess based on all of your homework to date) the success of this risky business in which you want us to invest, and then stick to that definition, regardless of what you discover as you move forward.”  Yet, successful innovation is rarely linear; ask any scientist, researcher, inventor.  You try, you take one step forward, then two backwards, then two forward—you know the drill.  That is how we solve problems:  we take risks, we make mistakes, we learn from mistakes, and we keep on plugging toward the goal.  Getting to eventual success is not something that can fit into a common grant cycle.  Nor is it something where we can promise a demonstration of positive impact at the end of every cycle.  Where in here is an incentive to take risk?

And while many funders will say, “But let’s have a conversation; we want to understand why you didn’t produce the impact you said you would, and then we will consider whether you are a sound enough risk for us to take,” others are seeking ways to easily perform triage on the pool of applicants.  The United Way of the National Capital Area recently announced that it would stop funding any nonprofit that did not raise $50,000 annually.  To correlate an organization’s fundraising ability with its potential impact (and that is what United Way now says it is all about—having an impact) is as spurious logic as ever there was.  It also puts fundraising above finding creative solutions to old problems.

The demand for achieving the set of hard and fast outcomes identified and defined before an innovative project begins (when all good outcomes should be defined), may, ironically, just be turning the few risk-taking nonprofits amongst us, while certainly discouraging the rest from even considering the possibility.  Is this the death knoll for the sector?

The demand for outcomes just may be killing innovation.

The opinions expressed in Nonprofit University Blog are those of writer and do not necessarily reflect the opinion of La Salle University or any other institution or individual.