Principle 2
View philanthropy as risk capital
Philanthropy has the power to bring significant social impact and address the world’s pressing challenges through new and innovative solutions. Embracing a risk capital approach is an important opportunity for foundations to take calculated chances, embrace unrestricted funding, experiment with new ideas, and learn from failures to drive progress towards more effective solutions. This involves adopting a structured approach to risk-taking, such as setting up experiments, testing hypotheses, and using data to inform decision-making which becomes entrenched in the organisational culture. By breaking down large, complex interventions into iterative experiments and pilots, funders can continuously learn, innovate, and adapt their approaches over time. Philanthropy can also work in a multiplicative effect with private and public sector funding by supporting early-stage innovations that may be difficult for companies or governments to take on. Overall, viewing philanthropy as flexible risk capital has become a driving principle for achieving significant social change, and donors should be willing to experiment, provide funding with fewer restrictions, accept failure, and take calculated risks to maximise their impact.
Philanthropy undoubtedly has the power to bring about significant social impact and address some of the world’s most pressing challenges, but this can only happen at full scale if we are able to take risks. In many ways philanthropy functions as society’s risk capital, by providing resources without the need for financial return which do not have to follow risk-averse bureaucracies. Several of philanthropy’s most unique and precious values include its ability to fail, support what markets or governments won’t, test new approaches and innovations that can be scaled and trust those who are closest to the needs.
In this sense, philanthropy as a whole has the potential to adopt a positive risk mindset. This means being open to supporting causes or issues that may be perceived as risky in terms of reputation– for instance for corporate and family foundations, there may be times when their philanthropic work does not correspond to what their audiences or authorities expect from them. In many parts of the world, funders shy away from some of the more critical issues that surround them such as land rights, gender-based violence, or civil society advocacy. While in some cases there may be genuine reputational dynamics that should be dealt with carefully, such perceptions are often overestimated while the potential to build new positive narratives tends to be overlooked. Oftentimes, foundations must revisit assumptions and perceptions of risk, asking themselves “will the absence of our intervention be a risk to that community?” rather than “will this intervention be risky for my foundation?”
Beyond the choice of cause, a positive risk mindset applies to the types of projects or approaches being supported. To tackle the big issues we all face, we must be willing to scale best practices and look for new approaches – and in particular seek novel solutions that address root causes rather than just symptoms (see Principle 7). This requires substantial resources, and philanthropic organisations are in a uniquely strong position to mobilise large amounts of financial, technical, and social capital that is more risk tolerant, and thus able to drive innovation and impact in ways that are difficult for other sectors.
Risk-taking is a key unique selling point (USP) of philanthropy, however, risk appetite varies within, and across organisations, and risk aversion limits the ability of philanthropy to confidently play its role in addressing key societal challenges. There are also different kinds of risks that should be considered such as financial, reputational, governance and impact risk. Understanding how risk is embodied within an organisation, identifying the risk culture and the risk management strategies is important to ensure impact is prioritised. There can be no ‘zero risk’, and in order to address the urgent, complex challenges we face, philanthropy should be willing to take on more organisational risks against the needs and potential benefit to society.
This principle encourages funders of all sizes and capacities to broaden their appetite for taking calculated risks that go beyond the financial and being willing to experiment with new ideas. With risk, there is also a chance of failure, so a vital part of adopting this principle is finding better ways to understand, accept and talk about failure in philanthropy. Funders should shift their mindset from one in which “risk” and “failure” are things to be avoided at all costs, to one that acknowledges that some forms of risk and failure are unavoidable elements of genuine social progress. Furthermore, we must find ways of “failing well”, so that interventions and activities that do not produce desired results are not wasted effort, but can be used as the basis for learning towards more effective solutions. Many donors are understandably hesitant to invest in untested initiatives or organisations, fearing that the money will be wasted, but a few major funders have started to release reports and insights on their experiences with risk-taking, failure, and learning that other foundations may look to emulate.
Taking a “portfolio view” of funded initiatives, where it is accepted that a proportion of the portfolio may fall short of its goals, could be one useful method. A risk capital approach views this not as a failure but rather a natural consequence of pushing boundaries to uncover opportunities for outsized impact. Embracing a structured approach to risk-taking, which may include methods like setting up experiments, testing hypotheses and using data to inform decision-making can bring significant rewards for philanthropic organisations. By breaking down large, complex interventions into a series of iterative experiments, pilots and scale-up phases, organisations can continuously learn, innovate and adapt their approaches over time.
Taking the principle of risk capital further may also include adopting elements of a “venture philanthropy” approach, which harnesses certain practices from the for-profit venture capital sector. By investing philanthropic resources and, where possible, non-financial support and guidance into social enterprises or social purpose organisations, philanthropists using this method can assist the development and scale-up of novel innovations for social impact.
Embracing a risk capital approach can also yield benefits when philanthropy works alongside private and public sector funding. Philanthropic capital plays an important role in de-risking financial investments and early-stage innovations that may be difficult or even impossible for companies and governments to take on otherwise. This includes identifying and validating promising, breakthrough solutions that can be further scaled through private and public funding at a later stage. De-risking can also validate, test and improve learning in the field, supporting further solution development and demonstrating impact potential. Philanthropic organisations may want to leverage their social capital to de-risk, by encouraging their network of partners to provide further funding and technical support, or by lending their own reputation to increasing the legitimacy of new projects. This is particularly crucial to help bridge the funding gaps often experienced by small or medium-sized organisations, and can support traditionally underfunded or marginalised communities and movements. It is important to note that venture philanthropy and certain risk-taking approaches may not be suitable for all types of foundations, particularly those working with causes that are difficult to quantify through future financial returns or material evidence (e.g. social movement building). Concerns about the dangers of using philanthropic funding to subsidise financial returns should also be taken into account if a foundation is considering implementing this approach.
Recent studies, including a 2022 report from the Cambridge Centre for Strategic Philanthropy, suggest that there is growing interest from philanthropic organisations in new financial and technical instruments including impact investing, platform philanthropy (crowdfunding) and blended finance, particularly to and within the Global South. For example, Hivos Foundation, one of the largest Dutch funders for international development, has historically embraced traditional models of grant-making and local partnership. In recent years, however, the Foundation launched Hivos Impact Investments as a way to support early-stage African companies and develop sustained economic impact in local communities.
Recommended practices for implementation
A starting point:
- Examine your current practices to assess risk appetite and tolerance within your organisation, such as attitudes towards innovation, failure, flexibility or tensions between core propositions like safe, secure and speedy donations, and the risk profile of existing portfolios.
- Engage with organisational stakeholders about their expectations and interest in adopting a more positive risk mindset and approach, and emphasise the value of organisational learning and feedback culture.
- Consider important stakeholders often left out of these engagements, including internal departments like human resources.
- Generate awareness of the potential impact of risk capital approaches, such as sharing success stories.
- Lead by example and share stories of failure, learning and adaptation within your existing programming (see Principle 1).
- Encourage collaboration and partnership with other donors and organisations to share risk and maximise impact.
- Incorporate evaluation into practices, while allowing for regular reflection and learning loops (see Principle 1) based on lived experiences in the field.
- Use data from feedback and evaluations to inform decision-making and assess the impact of your organisation’s initiatives.
Further steps:
- Expand organisational capacity and training to include expertise on different models of risk – whether on flexible philanthropic funding, investments, social impact venturing or decreasing bureaucracies.
- Explore, test and pilot new funding mechanisms such as unrestricted, multi-year core funding (see Principle 3), or venture philanthropy, impact investing, pooled funding and blended finance.
- Set aside a portion of your organisation’s annual funding specifically for either unrestricted grant-making or venturing activities.
- Broaden networks to connect with other funders, like impact investors.
- Actively foster communications, share knowledge and explore potential collaborations (See Principle 4).
- Leverage collective voice to share potential repercussions on the organisation’s brand or reputation.
- Provide sufficient financial and non-financial resources for grantee partners to learn and share their impact.
Potential obstacles
Suggested solutions
Organisational culture, internal misalignments, or conservative internal regulatory interpretations may create tensions and limit scope for experimentation and risk-taking.
Identify the different types of risk and the level of real and perceived risks and impact. Engage in discussions across the organisation to prioritise and develop contingency and risk management plans. Organisations can start by piloting proven models in the sector such as flexible or core funding programmes, creating a contingency fund for unforeseen circumstances and encouraging the sharing of failures and lessons learned.
Members of a philanthropic Board may be risk-averse and prefer to stick with tried-and-true grant-making practices, despite the fact that these may not be generating high levels of sustainable impact.
Grant-making between donors and recipient organisations may remain a core model of the philanthropy sector – and can in some instances be considered a form of risk capital. In order to realise the risk taking potential, share examples of risk-taking philanthropy programmes, share risk through potential collaborations with other foundations, encourage cross-organisational collaboration among Board members of different stakeholder organisations to build buy-in (see Principle 4), or diversify your Board/governing body.
A funding organisation is interested in experimentation, but doesn’t have enough internal expertise in this arena and fears taking the wrong decisions.
Where possible, an organisation can bring in temporary or full-time experts in a particular field to support the development of a viable pilot programme. Joining a relevant network to foster greater peer-to-peer learning is also an excellent option here (see Principle 5). Even after learning from experts, there is still a risk of the experiment failing, but embracing failure as part of the broader philanthropy learning process should be encouraged.