Restricted Grants vs. Operating Support III

More feedback on the topic of program support vs. operating support.

In a comment, Peter Mello of Sea Fever Consulting compares the mentality of a commercial bank and a venture capitalist in an analogy I liked. A bank lends money to a business with success being measured by the business paying them back with some additional interest. The bank doesn’t care if the company grows or is profitable. It just cares if it gets paid. A venture capitalist invests their time, money and expertise in a company with the hope that they can help the company grow exponentially. Both types of financial entities are needed in the for-profit world. It seems to me that nonprofits have access to bank-like support (via their regular base of donations, government funding and the same banks that work with for-profits), but they need more access to “risk capital”.

In writing about this issue, I came across a post by Paul Shoemaker (Social Venture Partners) regarding  restricted grants at the Stanford Social Innovation Review website. Quite a debate unfolded in the comments section. You should check it out.

And then today, Tony Pipa, Director at NGO Leaders Forum at Harvard University and former Executive Director at the Warner Foundation as well as Director of Philanthropic Services at Triangle Community Foundation left his thoughts on the issue and references Phil Buchanan’s comments:

Phil’s comment leads to a topic that I find interestingly absent in the operating vs. programmatic support debate: risk.

However much foundations like to portray themselves as purveyors of social "venture" capital, often foundations and their program officers are in the business of removing as much risk as possible. Very few foundations in my experience take a systematic approach to risk, where they explicitly create a portfolio with certain percentages for high-risk, potential high-reward investments; medium risk w/a decent chance at spurring a new innovation; and low risk, stable, you know what you’re going to get investments (i.e., the blue chips).

Psychologically, this means that most people tend to make grants only when they feel there’s an optimum chance for success (and an optimum chance for affirming their logic to make the grant in the first place) or they sort of create their own risk portfolio. It doesn’t mean that they will be totally risk averse, nor that they won’t point out relative levels of risk of different grants. But they are likely unclear as to the space they have to make big bets (and possibly fail) because it’s not explicitly integrated as part of the foundation’s overall strategy.

Psychologically, program grants seem easier to "control" and reduce their risk than operating grants. Smaller grants also "waste" less money if they don’t work out as intended. And if a foundation overall makes significantly fewer but larger grants, as Phil suggests of Ford, it places more eggs in one basket and increases the risk of ending up with the proverbial egg on its face. (One unintended consequence is that larger grants over time would tend toward more "stable" but less creative organizations, undermining the frission of innovation.)

This is not simply an abstract notion nor a personal "CYA" exercise for program officers. As William Damon points out in the foreward to "Taking Philanthropy Seriously," philanthropy is a serious intervention with potentially negative as well as positive consequences. Increasing the resources increases the potential risk for harm as well as good. And in this age of accountability, making lots of large bets that don’t pay off could put the foundation under a spotlight.

I mean to point out the psychological trap and its effects, rather than suggest there’s no way out. Good strategy – the discussion that Phil and CEP have gone a long way toward promoting – can take this into account, and risk would preferably be a topic that boards address with much greater frequency and understanding. Good feedback loops and transparency help. But these tensions are inherent in the grantmaking process, and to my mind it helps for them to be explicitly and directly addressed.