Weighing up risk on investments

What are the risks?

Each time a grant is made there is a risk that money will be wasted on a project that doesn't work out. In this context risk refers not to issues generally covered by risk-management policies - such as fraud or occupational health and safety for volunteers - but to a number of other types of risk:

• personal risk - backing an individual maverick innovator who breaks down, burns out, or blows up
• organisational risk - backing a body with poor management that affects its efficiency and effectiveness
• political risk - challenging the established order; getting too close to lobbying; risking media disapproval
• environmental risk - disregarding other factors in the external environment that cause the project to fail
• scaling risk - handing out grants that are too small or too short-term to be effective, or grants that are too big for the organisation to handle
• reputational risk - grants that for any (or all) of the reasons above threaten the reputation of the grantmaking organisation.

How should we deal with them?

The first step in dealing with risks is to identify:

• what risks your organisation is already taking, and of what type
• what risks your organisation is prepared to take, and of what type
• what risks can be reduced without losing other benefits or increasing harms.

The level of risk that is acceptable will be different for different grantmakers, and you must make decisions based on as many facts as you have to hand at the time.

Some grantmakers - including the Case Foundation in the US, for example - have found that their most successful initiatives have been those where they have been fearless and pushed beyond the usual boundaries of caution.

If you conduct a risk assessment in relation to each grant application you receive, you should document it so that:

• you clarify problems and solutions
• you provide a reference for new staff in future
• you have a basis on which to defend your decision if you are required to do so in future.

Effective grantmakers have to make sound choices when formulating strategy and managing operations. Carefully weighing up the pros and the cons of each option when making decisions leads to effective risk management.

Examples of strategic choices

• Alleviating symptoms versus understanding their causes
• Making short-term "quick wins" versus longer term change
• Maintaining independence from government versus working with government to achieve lasting change
• Remaining true to the founder's intentions versus responding to change and innovation
• Traditional "professionalism" versus "out of the box" thinking
• Responsible stewardship of funds versus risky innovation
• Maximising income for grantmaking versus spending on infrastructure to increase effectiveness

Examples of operational choices

• Making much-needed grants quickly versus ensuring well-planned applications, sound selection processes and effective grants
• Funding those with reputation and a proven track record versus funding the new and the untried
• Funding people you know and trust versus ensuring equal chances for all applicants
• Regular monitoring of grant recipients versus allowing grant recipients the flexibility to respond to changing circumstances
• Funding only those with the capacity for sustainability versus taking chances on change
• Responding to open applications versus proactively choosing priorities
• Responding to demands and needs versus staying close to priorities and principles
• Giving a small number of large grants for maximum impact versus giving a large number of small grants for maximum spread
• Giving longer-term grants, thereby tying up resources, versus retaining flexibility via shorter-term grants
• Funding core costs versus funding project costs
• Giving applicants all they ask for and encouraging dependence versus funding for failure (too little for too short a time).