Donating like a startup investor: Hits-based giving, explained

By EA Handbook @ 2023-12-06T18:11 (+14)

This is a linkpost to https://www.givingwhatwecan.org/blog/donating-like-a-startup-investor-hits-based-giving-explained

Warren Buffett and John Doerr are two of the most successful investors in the world. But they made their money very differently. Buffett, for the most part, made his money through "value" investing: he found solid, reliable companies that he thought were undervalued, put money into them, and watched that money go up.

Doerr, a venture capitalist, took a very different approach. He put his cash into incredibly risky startups like Google, Amazon, and Twitter. All those ventures had a very high likelihood of failure (the vast majority of startups fail, after all), and a tiny chance of becoming massive successes — which is, of course, what happened.

There are multiple ways to give effectively

Just as there are multiple ways to invest effectively, there are also multiple ways to give effectively. Some donors take a Buffett-style approach, donating to charities with a track-record of success and a high probability of helping people. Those people might donate to GiveWell's top charities, funding evidence-backed interventions like malaria prevention medicine or Vitamin A supplements.

Other donors choose to donate to opportunities where, although success isn't guaranteed, the potential impact they might have if they do succeed is so great that they think it's worth trying. To understand this, we can use the statistical concept of “expected value”, which looks at something’s potential outcomes and the likelihood of each of those outcomes happening to calculate an overall predicted value.

An example of expected value

An example will help make this clear. Imagine someone tells you that if a coin lands on heads, you’ll get $100, but if it lands on tails you’ll get nothing. There’s a 50% chance of each outcome occurring, so the expected value of the coin flip is $100 * 50% = $50. This is a really helpful way of evaluating charities, each of which has different potential outcomes and different likelihoods of achieving those outcomes.

Let's say there are two charities, Alpha and Beta. Alpha has a 100% chance of helping 1,000 people, so its "expected value" is 1,000 * 100% = 1,000. Beta, meanwhile, has a 1% chance of helping 1,000,000 people, so its expected value is 10,000. Donors that prefer certainty might donate to Alpha. But to others, Beta’s much higher expected value makes it a better donation opportunity.

This startup-like approach to donating has been dubbed "hits-based giving", a term coined by Open Philanthropy, a foundation aiming to give away its money as effectively as possible. (Full disclosure: Open Philanthropy provides funding for Giving What We Can.) But hits-based giving isn’t a new idea: there are historical examples of it working really well.

Historical examples of hits-based giving

One example comes from the Rockefeller Foundation, a charitable foundation established by oil tycoon John D. Rockefeller, which invested in research on how to improve agricultural productivity. One of its employees, plant pathologist Norman Borlaug, ended up developing the high-yielding wheat strains that fuelled the "Green Revolution". By increasing agricultural productivity, Borlaug’s work helped to massively increase the amount of food produced in the world, bringing millions out of hunger. He is now credited with having saved over a billion lives, winning the Nobel Peace Prize for his work — which other donors might have deemed too risky to fund. But because Rockefeller was willing to take the risk, a huge number of people were helped.

Rockefeller isn’t the only example of successful hits-based giving. Katharine McCormick, another wealthy philanthropist, was the sole funder of research that led to the development of the birth control pill, which has improved women’s lives all over the world. Without McCormick willing to gamble on the research, we might never have had the pill. It's possible that something similar could happen again. Research into protein sequencing might not pay off, but if it does, it could help stop the next pandemic. Genetically modifying mosquitoes could turn out to be infeasible, but it could also eradicate malaria.

The need for calculated risks

Hits-based giving doesn't just involve throwing money at every promising-looking opportunity, though. Instead, calculated risks need to be taken. Because most of the projects you fund will likely fail, you have to make sure that the ones that do succeed will succeed on a gigantic scale, to make up for all the losses you've incurred elsewhere. Looking at an intervention's importance, neglectedness and tractability is a really helpful way of assessing its potential for impact, and it's why Giving What We Can and many others think about these factors when advising donors how to maximise their impact.

It can also help to diversify your portfolio of grants. Startup investors rarely invest in just one or two companies. Instead, they spread their money across dozens or even hundreds of opportunities. When you're dealing with a low likelihood of success for each opportunity, increasing the number of opportunities increases your overall chance of success. The same is true for hits-based giving: Open Philanthropy says it "might expect just one or two 'hits' from our portfolio to carry the whole". Accordingly, it's made over 1,000 grants to various organisations.

The hits-based giving mindset

Hits-based giving involves retraining your brain a bit, too. As investor Paul Graham has said about startups, "if a good idea were obviously good, someone else would already have done it. So the most successful founders tend to work on ideas that few beside them realise are good." The same can be true for charities. Trying not to "defer to expert opinion or conventional wisdom" is one way to ensure you're not accidentally missing promising opportunities, Open Philanthropy advises. They do caution, though, that research is important — you should be informed of the conventional wisdom, even if you don't agree.

Lastly, you have to be willing to let go of the need for strong evidence. Some approaches to charity make use of randomised controlled trials, which assess whether interventions are really having the desired impact, and to what degree. That approach can be important in making sure that money goes to the places where it can do the most good. But many promising-looking interventions don't have much evidence backing them up, because they're too experimental or new to have established an evidence base yet. And for certain interventions, it’s almost impossible to conduct research to see if they’ll work. In fact, Open Philanthropy points out that "most past cases of philanthropic “hits” were not evidence-backed in the sense of having strong evidence directly predicting success." To be a hits-based donor, you have to be willing to take a gamble on something — an informed gamble, but a gamble all the same.

Ways to adopt the hits-based giving approach

If all this sounds appealing, you're in luck: there are ways you can adopt a hits-based giving approach. Charity Entrepreneurship, for instance, incubates new charities to solve big problems, and you can donate to these nonprofit startups. Donating to funds supporting the long-term future is another way to help — much of this money ends up funding experimental projects trying to safeguard the future of humanity. Who knows: you might even help save billions of lives by funding the next Norman Bourlag.