Gathering Information to Manage Risk

Risk is a normal part of the business of philanthropy, yet start-ups arguably pose more risk than other kinds of grantmaking. The former director of a large community foundation argues that there are times when a big risk is warranted:

“Sometimes the critical thing is not to be so critical. Why not just ask, Could this be a valuable thing to do? And if the answer is yes, give them some support.”
How can you offset the inherent risk of funding an organization that by definition has no operational or financial track record?

Here are some ways grantmakers have suggested for making the risks more manageable:

• Try some techniques of “due diligence,” similar to those private investors use for business start-ups. Even when there is no operating history to analyze, investors often gather other relevant information, such as the background of the people starting a new organization, the experience of other start-ups that might be comparable.
• Pace your support. The corporate funder of a start-up with an innovative but risky strategy chose to make its initial grant for two years only, with a promise of a very generous five-year extension if the model proved capable of expansion.