In my experience, risk tolerance is a lot like a sense of humor. Everyone thinks their own is pretty great, even if no one else agrees.
At Geneva Global, we spend a lot of time helping our clients to determine their risk profile. Understanding their appetite for risk is core to our ability to deliver meaningful, effective solutions for our clients. Philanthropy is an investment in social change. Like any type of investing, accurately gauging your own risk profile is critical to how you define success.
What are you willing to put forth? What are you willing to forgo? What result do you need to receive to make this endeavor worthwhile? How far out on the hypothetical limb are you willing to go in pursuit of social change? Risk—like humor—is subjective, relative, and heavily contextual. We react to our perceptions of it with deeply personal criteria that can be difficult to categorize and articulate.
In economics, risk is generally understood as the extent to which actual results will differ from expected results. A person who invests money must accept that their real returns could be very different, greater or lesser, than the initial value of their investment. The degree to which someone is willing to take on that potential difference is their risk profile, usually measured on a scale of low to high. An investor can seek out opportunities that match their own criteria on a given time horizon, with the knowledge that high returns are usually tied to high risk.
The core idea is similar in philanthropy. A donor invests money to achieve a desired level of social return, e.g. more children receiving an education or fewer people going hungry. But philanthropic returns are frustratingly difficult to quantify.
You can show, numerically, a lower prevalence rate for a deadly disease or higher levels of peace and prosperity in a former conflict zone. But how does that number translate as a numerical value versus the dollar amount of a grant or donation? Was that investment a “winner”? Should you decelerate your support, winding it down back to zero? Or go bigger, re-investing with even higher stakes?
If you asked ten different donors this premise on the same set of data, you’d get ten different answers. (It really is that varied, I promise. I’ve been in the meetings.)
The investment world addresses this challenge by using standard instruments like questionnaires and style boxes. Buyers and sellers can use a common language to define their interests, and attract like to like. Investees can report their results using a yardstick that everyone accepts, and investors can stay or go accordingly.
Meanwhile, in philanthropy, we struggle with meaningful categorizations. Grantees don’t fall into cleanly “stock, bond, or mutual fund” groups. Domestic and international concerns blend and overlap in complex relationships. There is no central exchange in which we can group all the health or microfinance projects, and compare how they perform like to like. Grantees are frequently asked to identify which portion of their results are due to a single investor’s shares.
Compounding this challenge, it can be tremendously difficult to accurately assess our own attitudes. Much of our own perceived tolerance depends on which baseline we are using, and with whom we are compared. Perhaps we are wild risk takers elsewhere but are exceptionally cautious in business.
Situational tolerance can also be dictated by circumstance; we may be accustomed to higher levels of risk in some arenas simply because we have no alternative. In their book Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, authors Abhijit Banerjee and Esther Duflo observe: “A friend of ours from the world of high finance always says that the poor are like hedge-fund managers—they live with huge amounts of risk. The only difference is in their levels of income. In fact, he grossly overstates the case: No hedge-fund manager is liable for 100 percent of his losses, unlike almost every small business owner and small farmer.”
As you can imagine, when these personal distinctions meet with the complexity inherent in global philanthropy, it becomes very, very challenging for social investors to accurately gauge their own tolerance. This in turn makes it difficult to identify which grantmaking opportunities and partners are best aligned with their own interests.
Absent a magical tool like the Sorting Hat from the Harry Potter novels which would allow us to identify and group funders and recipients into like-minded circles, how can a philanthropic investor gauge risk tolerance in a useful way?
There’s no easy answer. At Geneva Global, we invest significant time and effort in helping our clients digest these distinctions and make informed decisions. We use proprietary instruments—and a lot of hard-won expertise—to assess risk in a constructive way and to measure results thoughtfully. We even created an indexing tool that allows us to compare development projects across a range of factors and measure their social impact individually and in aggregate.
We also spend time with clients to understand them and uncover their motivations, desires, and ideal success state. As we tell our clients, knowing yourself is the best possible starting point, so here are five questions to consider about your own philanthropy. There are no right or wrong answers, just honest reflections.
1. What is your greatest philanthropic success to date?
Looking back, what do you consider your biggest “win” or most satisfying philanthropic “success” to date? Why?
I’ve heard variations on all of the following, and more:
- I discovered a passion for this issue.
- The project reached an incredible number of people.
- Something lasting was accomplished.
- I met with someone who benefitted from the project who told me it changed their life.
- We all came together to make this achievement happen.
- This work was a breakthrough in how the problem is handled.
Consider what a “win” looks or feels like to you. What factors made it so?
The goal here is to articulate your own criteria and then look for opportunities that best align with those principles. If you know that breadth of impact is the key to feel like you’ve contributed to important progress, then scalable solutions might offer your greatest promise of ROI. Conversely, an in-depth solution to a relatively narrow slice of an issue is not going to satisfy your end goal. You can certainly still invest in both solutions, but you’ll need a different yardstick to assess localized results versus a global enterprise.
2. What is your biggest philanthropic failure to date?
Looking back, what do you consider your most significant “loss” or disappointing “failure” in philanthropy? What social investment is a do-not-repeat for you? The reflections I’ve heard are, again, wide-ranging:
- We didn’t solve anything.
- It was all talk and no action.
- It was too expensive.
- It was the wrong time to build / do / invest / research.
- We didn’t have enough money to make an impact.
- Our work had an unintended, negative impact.
- I don’t know, I’ve never made a significant investment.
As you can see, these answers have nothing do with mathematical ROI and everything to do with internal value systems. Knowing what you don’t want is as important as knowing what you do. If you don’t know where your guardrails are, it’s easy to fall off the path towards social change.
If you are passionate about finding a cure for a specific disease, it’s unlikely you’ll click with an organization focused on general health advocacy. You might be better paired with a partner who, for example, is performing research in your area of interest, promoting early diagnosis or exciting new treatments, or making prevention information more easily accessible for hard-to-reach populations.
Interestingly, this question also brings up a lot of embedded assumptions about how we want to be treated as donors. I’ve seen clients categorize a project as “disappointing” because their interpersonal relationship with the grantee was a mismatch, even though the actual results were satisfactory. If you are someone who wants to receive deeply analytical reports and personalized progress updates, trying to cultivate a partnership with a volunteer-run organization that communicates primarily via social media will frustrate you to no end. (Pro tip: it will frustrate them, too.)
3. How far will you go, and where will you stop?
Using the health example above, what’s your personal timeline for finding that cure? If you invested a significant amount of money, what’s your time horizon for making a breakthrough—5 years? 10 years? 50 years? Or do you prefer to invest small to moderate amounts regularly, for as long as incremental progress is being made? It’s a question of expectation and pacing—are you running a sprint or a marathon?
I’ve observed that sprint-focused philanthropic investors can be quick to categorize projects as “failures” when progress is small or slow. On a personal level, I certainly understand the frustration of feeling that you are throwing your hard-earned money into a pit that can’t be filled. Conversely, in a professional capacity, I understand the frustration of explaining why a complex and mutating global problem that brilliant, dedicated teams of people have been working on for years is unlikely to be “solved” by a one-time single-pronged intervention.
This isn’t to say we shouldn’t aim high and dream big. Bold thinking and brave action are the core of philanthropy. But I do encourage social investors to self-diagnose whether they measure progress in millimeters or kilometers, days or decades, neighborhoods or nations.
4. Where would this money go, if not here?
Every decision has opportunity costs. By choosing A, you forgo B. In choosing C today, D may not be available to you tomorrow. In philanthropy, even with vast wealth, you can’t possibly fund everything you want to. So, what will you choose not to support by supporting this particular project?
This may seem like a backward framework. After all, we typically focus by narrowing down our options to a few best possible choices and then decide. But an interesting phenomenon occurs when a social investor isn’t comfortable with the risk level of a given project: they seek to divvy up the work or the funding in ineffective ways.
Let’s say that a grantee has an interesting but semi-high-risk project proposal. According to their pilot tests, it costs $1,000,000 to perform a task which can benefit 100,000 schools. Task X has three steps: Start, Middle, Finish. Each one must be performed by a specific person (a doctor, an engineer, and a teacher, respectively), due to the expertise necessary for that step.
The social investor is intrigued by the idea, but is nervous about the risks involved. What if it fails? So they start looking for angles. “What if we do 25,000 schools per year for four years?” “What if the teacher performs all three steps—surely that would bring the cost down?” “Do we really need all three phases? Can’t we just skip the Middle one?” Or, conversely—”What if we tried to double the number of schools for the same amount?” “Let’s add a fourth and fifth phase!” “Why limit ourselves to schools? Let’s add playgrounds, health clinics, and toy stores.”
You can see where this is headed.
No reasonable restaurant patron would suggest that the chef leave the ingredients unmixed or only cook half the dish before serving it. The result would be inedible, and the lack of proper outcome would waste time and money. But strangely, this happens all the time in philanthropy.
Sometimes it’s a question of experience or familiarity with a given issue or intervention. More often, it’s a question of risk tolerance: the project and the investor are mismatched and so the investor seeks to adjust the risk, up or down, to a more palatable level. Unfortunately, the nonprofit sector has a bad habit of acquiescing to these adjustments instead of being clear about the newly-generated risks—to quality, effectiveness, and sanity—that have replaced the original set.
By investing X dollars into a specific enterprise, you cannot put those same dollars into a different worthy enterprise. How important is that other enterprise? Is your current choice still worth it? If yes, proceed with confidence in your chosen investment. If no, then this isn’t the project for you—your heart isn’t in it, or your head has insurmountable reservations. There are a tremendous number of projects out there. Look for a project that better suits your own appetite for risk—there may be a better opportunity for you that’s already available with the same grantee.
5. Are you willing to be wrong?
Be honest. Is this investment an experiment to see what’s possible? Or are you looking for satisfaction guaranteed?
This question is very comparable to financial investing. In personal finance, if you can’t afford to lose a single dollar of your investment, then exotic unregulated offerings are not for you. Do not put all your financial eggs into that lone highly-leveraged basket. Diversify. Look for lengthy and consistent track records and plan for slow but steady progress. But if you have both the means and the appetite to take on a big risk, then get ready for the adrenaline rush.
There are plenty of philanthropic projects that can deliver consistent outputs over time—great, solid organizations that can use your funding to deliver a proven method over and over again. And they desperately need the long-term support of steady investors who believe in their model and want to see it continue. These are the blue chip stocks or indexed mutual funds of our sector: the gains may not be dramatic in the short-term, but over time they create real value and generate gains. Without them, critical problems will fail to get steady attention and investment.
Separately, there is no shortage of risky ideas that could become amazing solutions or abject failures, or even just unremarkable middling efforts. These are the currency arbitrage, venture capital startups, or other esoteric financial instruments I can’t describe accurately (because I don’t actually understand how they work).
These philanthropic investments typically work on shorter timescales and are focused on step-level social change. The promise of big returns is what makes them exciting to philanthropists. But chasing this promise requires big risk. Unproven methods don’t have a track record for you to assess. There is no real data, only untested hypothesis. You also run the risk of creating unintended consequences—worsening a problem instead of improving it.
And so a key question for someone looking to invest in a high-risk enterprise is, are you willing to be wrong? If “lessons learned” alone is a sufficient return, then this kind of speculative investment may be right for you. But if you need a weighty evidence base to move forward, then high-risk philanthropic ideas will just make you jumpy.
There are no easy answers to these questions. As I said at the start, risk—like humor—is subjective, relative, and heavily contextual. Your low-risk investment may be someone else’s wild leap of faith. I can rate a philanthropic project on a risk scale of 1 to 10 to allow you to compare and contrast opportunities, but I can’t tell you what number best matches your personal value scale. I can tell you to know thyself, and invest accordingly. And I wish you many happy returns on your social investment.