Pros & Cons of Major Donors

This article is a summary of Episode 49 of our Designing Tomorrow podcast. Each episode is a conversation between Jonathan Hicken, Executive Director of the Seymour Marine Discovery Center, and Cosmic’s Creative Director, Eric Ressler.

Major donors. These are people for our organizations who are contributing an outsize ratio of funding — usually an individual, a family, somebody with the resources and the belief in your cause that they're willing to put a transformational amount of money into your organization. That could be a different number depending on the size of your organization or the work that you do. So we're not even going to pretend to put a number on that. It's just the people who are really transforming your organization financially.

We want to talk about this by posing a couple of questions that represent two sides of the major donor coin.

Q1: Deeply Helpful or Mission Distraction?

One of the benefits of major donors is that they can become partners, but we have to ask: are these partners deeply helpful, or are these partners' mission distracting?

We've seen it both ways. Our reflections on organizations that are very major donor focused is that there is a certain healthy amount of tension in these relationships. In the best case, these are transformational partners, networkers, connectors — individuals and families who really help elevate and transform an organization. 

And in the worst version of that, they are sometimes combative, sometimes distracting, sometimes pushing around the team with outsized influence and outsized opportunities to create mission drift or mission creep. We've seen that happen too. 

It depends on the quality and the transparency of the relationship. What we can say is that when you don't have major donors, you really want them. And when you do have major donors, you're often looking at the grass is greener over on the other side: "What if we had thousands of individual donors" or "Man, what if we just got some grants for this work?" So there does seem to be this experience that whatever your fundraising model looks like, you're always curious about what else it might be instead.

The Best Version of Major Donor Partnerships

Let's unpack this a little bit. In the best version and related to the specific concept of a major donor being a strategic partner, which is what we all hope for, the best version of that is someone who deeply believes in the cause, particularly believes in the vision. Maybe they believe in you as a leader, maybe they believe in your team, maybe they have a deep history with your organization even before you arrived. There are a million reasons why somebody might be willing to partner with you. And in the best version of that, where the power is kind of on a level playing field, that can be incredibly productive. 

And that is the ideal version. That is what we're all looking for. Anybody considering building a major donor organization should be aspiring to achieve that kind of partnership. 

The challenge is — and we use the word power here — that there is inherently a power imbalance in these relationships. And intentionally or not, major donors do have the power to withhold funding if programs or impacts don't go a certain way, as is their right to do. The challenge is that for fundraisers or executive directors, there is constantly this question of: is it worth it for me to take that money with particular strings attached? 

And it is a question that comes up all the time. Do we compromise on the vision or our work to be able to bring in this gift which is going to be able to pay people, is going to be able to keep food on people's tables? Or do we say, hey look, this is where we're headed — we would like you to come along with it. But it’s up to you.

The Strings Attached

What are some of the common flavors of attached strings? At least in our experience, it's not so blatant. With major donors, it's always a conversation. It's the dialogue. And there are moments in these conversations where we realize where we're headed is maybe not exactly where they wanted us to go. Or even for the most sophisticated philanthropists, it's not delivering exactly the right kind of impact that they are looking to fund.

We've never experienced a donor saying, "I'm not giving you this money unless you spin this program up." It's not that explicit. It's never that blatant. Our clients have worked with some incredibly generous people — people they were so grateful to work with. And yet still, even with these relationships, they can tell that they aren't always a hundred percent aligned. And so that has to be a decision that's being made. Are you going to keep going down this path or are you going to hold your ground?

This obviously sounds like a potential pitfall of relationships with major donors, but maybe a more generous framing of that is just a consideration, something to be aware of. 

Let’s try a thought experiment and see whether or not this kind of pencils out in the field — should you think about major donors as a partner that you want to assess as if they weren't donating money at all, that you just take money out of the equation and you ask yourself, would I still want this person on my team if it weren't for the financial side of it?

And really what ultimately happens most of the time is an honest conversation between adults, right? Where it's: We hear what you're saying and this is where we're headed. We can hear you want X, Y, Z thing. How can we make this all work? How can we build this together? Is there a version of this where we're both achieving the outcome that we desire?

When Good Intentions Miss the Mark

How often do major donors have really good intentions with some of their requests or their ideas, but they just aren't informed enough about the space or the work or the inner workings or the details? Do you see them making a potential mistake in their aim that you can see because of your vantage point or your past experience? And do you have to gently and respectfully, not to say educate them on because that feels kind of patronizing, but involve them in that conversation?

You’re always trying to approach conversations with major donors from the perspective of: we want to help you deliver impact in the way you want. Obviously we think our organization is doing that best, and so you should put your money here. But we want to help you discover where to put your money where it's best fit. 

And sometimes you might have to have a conversation with a donor where it's: Hey look, we actually think those guys over there are doing what you want to achieve here. Can “ introduce you to that team? 

That's part of the trust building, that's part of the partnership that emerges. But the ideal version of it is one where we are helping this person or this family achieve their legacy or the impact that they ultimately desire, whether with your organization or not.

Q2: High ROI or Shiny Distraction?

That brings us to the second question: Is a major donor program a high return on investment, or just a shiny distraction?

So there's this dream: Oh my gosh, we could have this handful of people who are going to fund 50% of our work, and it's just these three or five families. Amazing. That means we can get back to the impact work. We can get boots on the ground and we don't have to do all this fundraising stuff. 

And look, there's truth to that. If you have those relationships, you can spend more time as a leader working on your strategy, helping your team, whatever you need to do. But the pitfall is that major donor programs take a lot of time and a lot of work, and relationships and trust take a lot of time to develop. 

You need to be developing these relationships over time. So you need to ask yourself: do I have three years of runway? And also as an executive director, how much of your time — literally, down to the percentage — do you have to dedicate to this?

The $1M to $5M Thought Experiment

So let's do a little thought experiment here, which is really relevant to a lot of the work that we're doing. This is always case dependent. But let's say you are a $1 million a year organization and you have very ambitious goals to become a $5 million a year organization within the next two to three years. You have a number of different plays you could make, a number of different levers that you could pull to try and get there. 

And obviously depending on where we're starting from and where we're trying to go, there's not one answer to this, but let's say there's a few big levers. We've got major donor fundraising. We've got trying to get funds from institutional philanthropy — grants or gifts from the government or philanthropic organizations — and we've got individual giving. If you had to place one bet on those three modalities, which would you think generally speaking is the most sure bet to grow from a million a year to 5 million a year?

We know that the “it depends” factor on that question is through the roof, but let's try it. In our experience, the major donor program is the way to go, and it's a different kind of competition. So you have to think about where your strengths are as an organization. But there's different levels of competition — or rather, different levels of selling, if you will. With grants and institutional giving, there's criteria and there's boxes you have to check, and you might be competing with hundreds of other organizations for that money. So there's a positioning that has to happen. But you're putting yourself up against a huge competitive risk unless you have a direct line to the program officer, the decision maker there — some kind of inside track.

What we’ve seen with grant programs is that you put out a hundred and you win one. If you're starting from scratch with a major donor program, it's a different kind of selling. It's a different kind of competition, where really you're competing for the hearts and souls of the people that are standing in front of you. So if you're a really good storyteller, if you yourself or someone on your team is good at connecting with people and pulling on those heartstrings, that is a vote in favor of a major donor program. If you've got the machine to just crank out a high volume of grant applications, maybe that's your strategy. There's a million other factors that go into it.

That's a really important distinction. And of course there's all kinds of other factors at play here. So it's definitely a thought experiment, not general advice anyone should take reading this. But we get this question a lot actually because part of our job is to help figure out where organizations should place bets to grow. A lot of our work — when it comes to strategic communications and branding and design and all the kind of stuff that we do — comes down to: Well, what's your fundraising strategy? And that's a little bit of a Catch-22 — What's the marketing strategy? That's the answer that's rung true for us and that we've seen pan out.

Although there is this kind of shiny object of major donors being the fastest way to get funding. And we have seen that people often have unrealistic expectations around how fast that ROI is going to pencil out. Still, all things being equal, if you're starting basically from the same level at any of those three modalities, we believe that major donor fundraising is the fastest way to get the most substantial funding.

And usually unrestricted funding too, which can be a huge boost to whatever you're doing.

Flexible Funding or Getting the Rug Pulled?

So, all else being equal, that strategy is a safe bet. Now, let's talk about funding flexibility. The question is: Is it flexible funding or are you setting yourself up to get the rug pulled out from underneath you?

This is something that we have personally seen, where you have a great relationship with this transformational donor and they have been funding you in an unrestricted way for some time. And it's within their right to change their mind and restrict their money to a specific use. And so if you've built up a dependency on this particular gift coming in at a particular time every year, and you're used to using it in one way and you've built your budget to be able to use it in that way, and then the donor changes their mind and says, Hey, I actually am really excited about this project that you're working on, I want it to go there — the ground beneath your feet can shift with major donor funding, and so you have to build in some fail safes for that. You need to be really confident.

It is so stress-inducing when you don't know where that money's going to be put when you've built a budget a certain way.

Institutional vs. Individual Major Gifts

In our experience, that can happen with institutional funding too, but it kind of happens on the front end a little bit more. Where it's: Hey, we're going to write you this big grant, but we're going to spend a lot of time figuring out exactly where that money's going to go. We're going to scrutinize your investments and your team salaries for that project and it can't go to any other programs. 

Now, obviously that's not always true. There's a growing movement to trust-based philanthropy and grants being unrestricted in the best case, even multi-year general operating grants that are providing some of that stability that social impact organizations are traditionally lacking. So there's no hard rules here. There are also major donors who are doing multi-year grants and who understand the benefit of that unrestricted funding.

The differences between institutional and individual major gifts — They’re like any big bureaucracy or any big organization — they move slowly. They're more mature. They're more deliberate. And you'd expect that. You'd expect a little bit more of that upfront, and also on the backend where sometimes the institution decides that they're going to start moving their money, but they give you three years of headway. So you have some time to cover your bases.

But not always. We've seen it the other way too, where an institutional funder has decided: By the way, we know we've funded you for the last seven years, but our funding priorities are shifting away from your niche and we're now focusing on something else. So in service to our new priorities, unfortunately we're not going to be able to come through on our gift again this next year. And yeah, they do usually have a little bit more runway. But we've definitely talked to social impact leaders who have felt blindsided by that — even if maybe it was even upwards of a year of notice, which is a very respectful amount of time, but still makes it hard to plan.

That's probably the exception, not the rule. But for the ones that are doing that, we challenge those foundations to do better because we need to be able to rely on funding, especially from a mature funder. We would say: Do better.

And actually, if we are going to continue to have foundations, which we should, and we are going to institutionalize philanthropy, then we need to be challenging ourselves to be the most effective funders possible. There's a lot of research and a lot of experiences and anecdotes at this point that confirm that stability — that unrestricted stability — is really the magic secret sauce that a foundation can play a part in. They can do it in a way that's different from even individual family donors or individual donors who aren't as far along on their philanthropy path and maybe not as informed around philanthropy. Or maybe for whatever reason, they want to give more from their heart, and that's their right to do so, and that's okay too.

If we're going to continue to allow for philanthropies and foundations to exist and get the benefits of setting up that way and having requirements around how much they pay out, then there's sort of a responsibility that they are as respectful and as forward thinking in how they give as possible.

Singularly Impactful or Single Points of Failure?

Funding being pulled unexpectedly brings us to the next question about major donors specifically: Are they singularly impactful, or do they create single points of failure?

When you have, best case scenario, a handful of major donors who are really engaged and they have a really positive trustworthy relationship, and they are having a singular impact on your mission — that is a beautiful thing when you can get there. The challenge with this, especially if you have a small number of these transformational donors, is that you can create these singular points of failure. Meaning that if one donor drops out, then you are screwed and you're scrambling. And sometimes, especially with major donor programs, you don't know when that's coming. 

Sometimes those major donors are particularly attached to one staff member. Maybe it's the executive director or the director of development or program staff, and if that staff member leaves, now that donor's at risk. Or maybe that family moves to a different part of the country and now they're going to focus their monies elsewhere. And if you have these singular points of failure, that can really hamstring an organization that's been relying on them too heavily.

The "Whale Client" Concept

This reminds us of a concept that we think about a lot in terms of our client roster, which is the concept of a whale client or a gorilla client, which basically means: As you're building out your books for an agency, if any client exceeds — and there's different thresholds that people throw out there — but let's just say more than 25 to 30% of your annual revenue, that's a risky situation. 

And this happens all the time in the agency world where an agency scales because they landed a whale and that whale is 50, 60, 70% of their bookings. All of a sudden that whale client moves on for whatever reason, and now they're faced with the rug being pulled out from underneath them. The concept is basically the same, and we don't know what the metrics should be for a nonprofit or a social impact organization, but probably about the same. If you have more than 20, 25% of your revenue for the entire organization — maybe we could even argue for any particular program — relying on one major donor, there's just a risk assessment that you have to do there.

The Case for Individual Giving

This reminds us of the third major modality of fundraising: individual giving. The big perk to individual giving is that instead of having tens of major donors, you have hundreds, thousands, hundreds of thousands of individual givers. Now individual giving is trending downward generally with the exception being recurring giving, kind of making up for that general downward trend. And there's retention and all kinds of other things you have to worry about with individual giving. 

But the major perk there is that losing any one donor is not as big of an issue. It's more the bigger trends that happen. Usually those individual giving programs and monthly giving or giving circle programs are also unrestricted. So our sense of that modality of funding is that it's the most resilient in theory, but it also requires the most effort and the longest time span to move from zero to fully funded on that model.

You've got a thousand points of failure in that particular model. And not all organizations are suited for that kind of model. And even if you are, it could take a really long time to get to the place where not only are you making up for the funding year to year, but maybe you're even having to pay off your investments to get this thing going. So that could be a five to ten year project.

That's usually what we tell people. When people come to us and they're saying, we have a very early stage individual donor program, we have a hundred or so people donating to us a year, it's making up 10% of our budget, we want that to be 90% — lot of our job at that point is to say: Hey, let's first assess whether or not we think that's the right move for you. Because sometimes it is, sometimes it isn't. 

The general sense is that the simpler it is to tell your story, the more intuitive your impact is, the more likely it is that an individual giving strategy is going to pan out. The less intuitive, the less easy it is to tell that story, the harder it is for that to pan out. 

And what's the threshold around when you start to break even? And that depends on so many factors, but years, not months is generally our experience on that. Which doesn't mean it's the wrong play, but a lot of this is around expectation setting. 

It's the grass is greener fallacy of: "Oh, I'm so fed up with all of our individual donors, our major donors. I'm so fed up with — I'm never writing another grant application as long as I live, I'm going all in on individual giving." And that might be the right move, but you just have to have realistic expectations around what level of effort is going to be required to make that move and what kind of time span or time horizon you're looking at in order to fully make that transition.

How to Counter the Pitfalls

So let's talk a little bit about how you can counter some of the pitfalls — things you can do as a leader to make sure if you do pursue a major donor program, or you want to grow it or improve it. How can you take the best version of what we've talked about today and keep it that way, and prevent the bad stuff from happening?

First, if you're not there already, get to this — and there's no other way to say it than: get to a really healthy working relationship with the donors that you do have. Find that partnership level conversation. Step into your power and know what your priorities are, have clarity on what you're asking for and how you're going to use it. Invite that person to be a partner, but know how to set boundaries. 

You need to seek that with your major donors, and that's the first thing we would say to avoid some of the pitfalls here.

Be Disciplined About Your Donor Pipeline

The second thing would be to be hyper-disciplined about your donor pipeline. That helps prevent things like having that single point of failure. What we mean by that is making sure you have a really clear sense of how much money is in your pipeline and at different giving levels, and also knowing which donors are ready to step into the major donor role if they haven't yet — so that if you do lose one, you've got folks on deck that you're ready to go and approach for that next conversation.

Being really disciplined with this donor pipeline can help mitigate a bit of that risk.

Who Should Own Major Donor Fundraising?

Who do we think should be responsible for major donor fundraising within an organization? Just generally speaking? 

The executive director. 

How about the development director in partnership with the executive director? Absolutely. 

What about the board chair or anyone on the board? 

Certainly as contributors.

How about the CMO type role? 

We want them to be telling stories and feeding us content and feeding the ED things to talk about, but we want to have a seat at the table for the major donor conversation.

Ultimately, it should live with the executive director. 

Are Major Donors Born from Small Donors?

More often than not, yes. And there's all kinds of tools out there that are built around wealth engines and identifying potential major donors. Our sense is that those tools are helpful. They're not necessarily the only or the main way you should be assessing major donors. We want to be looking for donors who are aligned around generosity and not necessarily just wealthy people. And sometimes people will give more than you expect them to, and other times people will give significantly less than you expect them to.

Consider treating your lower level, higher volume givers as the basis of your major donor pipeline. Look at the behaviors of all of these lower level givers and try to identify — using some wealth screening technology — people who may become those major donors. Develop a stewardship process that you run people through. But again, it's not a perfect tool, but it is incredibly helpful. And we also look at other indicators that help surface those people.

Key Signals for Identifying Potential Major Donors

What are some of the key signals to look for to identify individual donors who are potential major donors? 

• The history of giving.
• Wealth estimates, some sort of capacity estimates.
• Engagement. Are they attending events? 
• Digital engagement too. Are they in conversation with us digitally?

These are all really good foundational practices to put in place. If you are going to invest in some kind of major donor or major giving program, it seems very natural that you should start to build some of these basic foundational systems from the get-go versus just kind of shooting from the hip at first.

But you can do both. If you're really, really, really truly getting started fresh, get out there. You don't need to build a process. The process will come. 

But if you've got some history and some systems with giving, you have to be disciplined with that pipeline. You must be disciplined. Otherwise, what ends up happening is you get into this hope-based fundraising model where you're just crossing your fingers hoping that that major donor comes through and you really don't know how much they're going to give or when they're going to give, and you're living on a prayer. And that is a really dangerous way to do this kind of work.

As football coach Vince Lombardi is credited with saying,

That's true for many things in life, but especially as it relates to fundraising.

Key Takeaways

To wrap it up. We have recently, especially in light of a lot of federal funding disappearing overnight, been helping clients build out some of these programs and start to build out some of the marketing and the activation work around these programs.

The main pros of major donor fundraising that we’ve seen are that even though it's not necessarily fast, it's one of the faster modalities to raise significant money quickly if you're primed for it. And that it can lead to unrestricted funding, which is obviously a huge boon to any social impact organization. And a lot of the work that you need to be doing for major donor fundraising is going to be synergistic with some of the best practices of just developing meaningful relationships and responsive relationships with your community anyway.

Even if you don't get major gifts right away, it's still worth doing.

That's a hundred percent it.