As a foundation that invests its money in other organizations, one of the aspects of assessing an organization is risk. How would you define risk? And since everything comes with a risk, what are the good risks as opposed to the bad risks? What questions should one raise?
I think there's something to be learned from the for-profit world about good risks and bad risks. Venture capitalists are in the same position foundations are -- they invest in other organizations with the goal of helping that organization succeed. Venture capitalists divide risk into different categories, including execution risk (can the leadership do what needs to be done?), market risk (is the customer going to buy?), competitive risk (is there another company offering something similar/better?), funding risk (can the organization raise the funds it needs to sustain itself and grow?), intellectual property risk (does the company have the right to use the intellectual property it is using?) and technology risk (can the technology that's needed be developed?). When an investment is being considered, VCs will score, quantitatively or qualitatively, the investment on each of these risk categories. When an organization is new, there are many unanswered questions, and therefore many related risks to those questions. As the organization answers those questions, those associated risks are minimized, and the value of the company increases. One important aspect of venture investing that's related to dividing up risk is the practice of staging investments. New companies with lots of unanswered questions generally raise only small amounts of money, and as the company grows and proves itself, investors are willing to invest more in the company.
I have one additional point based on my experience as an entrepreneur and investor. Good risks are those that the organization can work to minimize. Bad risks are those that are outside of the organization's control and perhaps even knowledge.
Comment
I think there are other risks associated with funding nonprofit programs besides the economic, legal, and technology ones you mention. Having been the first consultant to walk in the door of numerous newly funded nonprofit initiatives, I found that about 90 percent of them were no where near ready to leave the ground. Insufficient funding was usually not the problem. A closer look often revealed a deficiency in one of three fundamental correlates of program success: 1) reasonability 2) feasibility, 3) measurability. Translated into risks, that’s idea risk, implementation risk, and evidence risk - all “good” risks by your definition.
Although customary due diligence processes guarantee financial, organizational, legal, and management soundness, they often do not encompass measures designed to assess more subtle predictors of success. They do not fully reveal whether programs have realistic expectations, sound logic, or the ability to objectively demonstrate whether or not their efforts will make a difference. When programs are not assessed for these risks upstream they potentially waste resources, provide false hopes, and, most importantly, deny recipients the services they were promised to receive.
»» Posted by: Susan Eliot on March 17, 2008 12:43 PM