How Philanthropy Could Embrace More High-Risk, High-Reward Projects

At its best, philanthropy isn’t just about shifting dollars from one person’s pocket to another. Instead, it’s about creating social change that is broader and longer-lasting than any one transfer of money. But aiming for social change is risky—it requires taking on high-risk, high-reward projects that might pay off in an outsized way, but that might totally fail.

Many philanthropists claim to want such a model, but fail to follow through. I think this is because of a psychological aversion to risk, and offer a way forward that would allow philanthropists to take on more social risk while avoiding the psychological penalty of having funding something that “failed.”

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Whether it’s called “venture philanthropy,” “innovation philanthropy” or a number of other similar terms, some argue that philanthropists should adopt a venture capital model of funding high-risk, high-reward projects. Venture capitalists are willing to see nine out of 10 investments fail if the 10th is an early investment in next Apple or Google. The outsized returns in that 10th investment more than pay for the other failures. So too, philanthropy should be open to high-risk projects that might fail.

For an example of this sort of thinking, Open Philanthropy (funded by one of Facebook’s co-founders) says this: “Our overarching goal is to do as much good as we can, and as part of that, we’re open to supporting work that has a high risk of failing to accomplish its goals… We suspect that high-risk, high-reward philanthropy could be described as a ‘hits business,’ where a small number of enormous successes account for a large share of the total impact—and compensate for a large number of failed projects.”

And as Gabriel Kasper and Justin Marcoux argue in a 2014 piece, “Instead of just supporting proven, incremental solutions, [innovative philanthropists] focus on transformation—investing in approaches that may have a higher risk of failure, but the potential to be lasting and truly game changing if they succeed.”

The venture capital model for philanthropy makes a great deal of sense. Perhaps alone in all of society, philanthropists are immune from the usual incentives of politics and the marketplace. Unlike corporations and investors, philanthropy doesn’t have to obsess about quarterly returns, consumer demand, or upstart competitors. And unlike politicians and policymakers, philanthropists don’t have to worry that taking a forward-looking position will get them fired or voted out of office.

As a result, philanthropists can take on projects with longer-lasting, broader impact than the immediate recipients of the grant dollars. For example, the philanthropists who supported decades of political and legal activism leading to the recognition of same-sex marriage had an impact far beyond the mere dollars spent.

Here’s the problem, though: There’s not nearly as much “high-risk” philanthropy aimed at social change as one might expect from all the rhetoric.

As a team of Bridgespan researchers found, while roughly 80% of major philanthropists claim that social change is one of their top priorities, “just 20% of big bets, by dollar value, went to the areas we categorize as social change giving… The other 80% of big bets fall into what is best described as institutional giving—primarily to universities, hospitals and cultural institutions. These entities are hugely important to society, but they are often already richly funded, with ample capacity to continue securing major gifts.”

Why the mismatch between philanthropic ambitions and reality? The Bridgespan authors point to the lack of nonprofit capacity, the lack of personal relationships with social entrepreneurs, the difficulty of measuring social change, the reputational risk of pursuing social change, and more. And it’s also quite reasonable to point out that nowhere near all of philanthropy needs to take the form of high-risk “big bets” (see Larry Kramer’s essay on that point).

But I think there’s an even deeper reason that it is difficult for philanthropists to take on high-risk, high-reward projects, even when they want to do so.

It’s all about psychology.

In actual venture capital, the money that you (hope to) make from a handful of successful investments is enough to counter the money that you might have lost on other investments. The money you receive literally outweighs the money invested.

In philanthropy, though, there aren’t any monetary returns to the philanthropist—the whole point is to give the money away. What the philanthropist might gain from giving money away is (1) a positive reputation, and (2) a sense of psychological satisfaction from seeing that a grant made a difference to the world.

But reputation and psychological satisfaction can’t be added up the way money can. If a philanthropist makes 10 high-risk grants and only one of them succeeds, the satisfaction from that one success isn’t commensurate with the psychological pain, embarrassment and reputational hit from the nine failures. In fact, the nine failures may well collectively weigh far more on the philanthropist’s mind than the one success.

That’s the real reason that even philanthropists who are attracted to “high-risk” grantmaking end up giving to universities, hospitals, food banks, etc.

With traditional grantmaking, you can be much more certain that every single grant will increase your reputation and psychological satisfaction. That’s more of a reward than enduring failure after failure. Indeed, I suspect that many philanthropists who start out sincerely intending to do high-risk, high-reward grantmaking instead gravitate to safer projects over time. Even if they don’t turn to writing checks to museums, they find all sorts of ways to hedge their bets and to limit risk (and hence reward).

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Is there a way around this psychological aversion to philanthropic risk-taking?

I’ve seen one solution thus far: Set up a separate initiative that bundles money from multiple philanthropists, takes on an assortment of high-risk projects, and then emphasizes the successes in a way that makes everyone feel like an essential contributor to the project.

No individual philanthropist needs to feel psychological pain from the failures. After all, money is fungible, they weren’t directly involved in the decision making, and the failures can be swept under the rug. But they can enjoy the reputational and psychological benefit of the successes.

Here’s a real-world example: The Audacious Project, run by TED with research and consulting support from Bridgespan. (They’ve also recently started working with the Giving Pledge.) The project carefully selects a few nonprofit ideas deemed to have world-changing potential, and then showcases those ideas in finely honed presentations to a select gathering of philanthropists. The nonprofit efforts are quite diverse, and include aiding 1 million farmers in developing countries (the One Acre Fund), bailing out misdemeanor defendants who are too poor to pay bail, improving the collection and analysis of data on the police, or figuring out ways to communicate with other species.

Some of the nonprofit leaders are then chosen to give TED Talks to an even larger crowd of potential philanthropists. The most popular projects can come away with tens of millions of dollars in new donations—and occasionally, even more (the One Acre Fund reportedly got $100 million).

Notably, the Audacious Project rouses up support for these ideas in a way that not only reduces philanthropists’ risk aversion, but even creates heightened psychological pressure to jump on board with a high-risk “big bet.” The message amounts to: “Here’s an impressive idea on which all the background work has already been done, and other well-known philanthropists are already in for $X million dollars. Don’t you want to join in?” The messaging can even create fear of missing out, which is a powerful psychological force in itself.

On a smaller and more targeted scale, there is FastGrants, an initiative run by the Mercatus Center at George Mason University, which focuses on COVID-19 research. Many philanthropists (including Arnold Ventures) have donated to FastGrants, which then regrants the money to a wide array of scientific projects within 14 days of an application (hence the name “FastGrants”).

Many of the projects are speculative and might completely fail. They involve COVID-19 vaccines, biomarkers, therapeutics, testing, risk factors, data science, and more.

But a few might have outsized impact. For example, FastGrants funded scholars at Yale to develop a rapid saliva test for COVID-19, which the FDA provisionally approved in August 2020. The test is intended to be free and open-source. In the words of Andy Slavitt (who Obama appointed to lead the Center for Medicare and Medicaid Services in 2015), this “could be one [of] the first major game changers in fighting the pandemic.” (The Yale scientists were also funded for this project by the NBA, which has a keen interest in quickly identifying and isolating any player who has COVID-19.)

If Slavitt’s prediction pans out, all of the donors to FastGrants can rightly feel like they enabled a huge success. Indeed, even if the entire $40 million had gone to that one project, the societal benefit from a free, rapid saliva test for COVID-19 could enable much more reopening of societies around the world, and would be worth several orders of magnitude more than $40 million.

On the flip side, the donors to FastGrants don’t have to experience a reputational hit over any failed grants. After all, they didn’t pour their personal and intellectual capital into each and every failure. Instead, they gave to a broader initiative that promised a collection of rapid investments in promising solutions to COVID-19. Thus, they are psychologically able to ignore the failures while feeling like they enabled the successes.

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The Audacious Project and FastGrants are just two examples, and there are other efforts to aggregate philanthropic capital (Blue Meridian Partners and Co-Impact, for example). But that’s not enough. One can imagine many more targeted initiatives—on everything from reforming the police to addressing pandemic risk—that aggregate direct donations from individual philanthropists who haven’t set up a well-staffed foundation, or that work with the many billions currently hosted in donor-advised funds. The goal would be to create new vehicles that would allow donors the chance not just to get a tax deduction, but also to participate in a high-risk, high-reward campaign for a bigger cause, and to get a reputational and psychological benefit from any success.

While high-risk philanthropy isn’t the only way, we still need more risk-taking philanthropists. That means we need more initiatives that solve the psychological problem of risk aversion.

Stuart Buck is vice president of research at Arnold Ventures.

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