Risks: The Stomach for “No Pain, No Gain”?

Funder (or Investor) Risk

Risk and innovation go hand in hand. When you start a new company, the major risk you face is not succeeding. Some argue that a tolerance for failure is the defining characteristic of Silicon Valley—that it is the only place on the planet where the experience of failure is almost as valued as the experience of success.

The key difference for the social sector, though, is that more is at stake than simply not making money. When you innovate for social change, the major risk you face is what economists call “opportunity cost.” Opportunity costs are the costs incurred by having tried something at all. Everybody has limited time and attention, and each time you choose to do something there is a risk that doing something else would have led to a greater return.

Nonprofit funders seem to feel that opportunity risk more than for-profit funders. When for-profit investors and entrepreneurs make a risky investment on a new initiative, it’s a given that they may lose all their money, and also a given that the payoffs (or upside risk) are substantial. In the social sector, funders are less sanguine about the risks they are incurring because they are constantly trading off donations to one cause versus another. There’s not as clear a metric at the end of the day as there is in the private sector (return on investment). Instead, there is some real regret that, but for that risky failure, more good could have been done.

Individual Risk

The upside risk to individuals is also a consideration. Founders of for-profit startups are at least partly motivated by a big financial upside, whereas social entrepreneurs are often considered to risk nothing but reputation. Consider, though, the longer-term risk profile. A business entrepreneur may take big risks a number of times in her career, counting on luck and experience to lead to one or two “home runs” financially speaking (big bonuses, stock options, and other advantages) that provide a basis for retirement and security as she ages. A social sector entrepreneur has no similar “home run” horizon, at least financially. It’s not news that you don’t make as much money in the social sector, but the emphasis in the lean startup on fearless exploration and failing fast brings home the individual dimensions of these career choices.

Risk to “Customers” or the Field

Remember the “fail fast/can’t fail” paradox we discussed earlier? A corollary is that, because social and political capital is a key part of social sector innovations, there is a risk that the experimentation inherent in the lean startup will wear out not the financial capital, but the political and social will necessary to take action. The innovation may itself lead to participants in the relevant field getting “innovation fatigue.” An extreme example of this may be public support for the US war in Iraq. Given bottomless political will, the US military might eventually have found a way to stabilize that country, but the public’s appetite for continued involvement and Iraqis’ own patience for foreign occupation clearly wore thin well before a stable political and military situation could be established.

Inertia or even backpedaling can overcome a social sector initiative that takes too long or makes too many pivots in its search for a solution. Opponents of the innovation (think insurgents in Iraq) may also capitalize on this fatigue. This is a risk that also needs to be carefully managed in any situation, but one a lean startup particularly needs to deal with.

There are more differences between the for-profit and nonprofit sectors, but this chapter has covered those most important to making the lean startup happen. It’s time to start making change!