Since 1980, wealth has become more concentrated toward the top end of the income spectrum. The top 10% of Americans have seen their average pre-tax income double, the top 1% have seen it triple and the top 0.001% have seen it increase sevenfold.1
The consequence of this wealth concentration is that while the wealthiest donors are making larger gifts than ever before, American charitable giving is in decline overall. In 2014, 56% of American households made a charitable donation — down 10% since 2000.2
Increasingly, non-profit organizations are putting a greater emphasis on the wealthiest "megadonors" (those who give gifts in excess of $10 million) in hope of obtaining large, potentially transformational donations with a perceived minimum of effort. However, while these megadonor relationships can offer significant rewards, they can also be quite risky. Non-profits must grapple with the realities of dealing with megadonors if they want to be able to truly enjoy the benefits.
A Potentially Transformative Relationship
Today, there are over 2,200 individuals and families in the world with fortunes of a combined value greater than $9 trillion dollars.3 This narrowly concentrated pool of wealth is understandably attractive to non-profits, which are always seeking the most efficient way to raise funds. In theory, being able to satisfy funding needs while managing a smaller number of donor relationships could put less strain on the institution's resources, and the big monetary bets that these megadonors are willing to make could have a previously unimaginable impact on the institution's mission.
Furthermore, there's still room to grow in this space. In the U.S., families with over $500 million in assets typically give an average of 1.2% of their wealth every year.4 In many cases, they're uncertain about how to enter the philanthropic space, and test the waters with a handful of smaller gifts before committing to a particular institution or issue. They may hesitate or even give up entirely for fear of making a mistake. A savvy non-profit with strong leadership and a willingness to partner with these megadonors could unlock more of that wealth and help them reach their full philanthropic potential.
Putting All the Eggs in One Basket
While the benefits of successfully courting a megadonor can be significant, the risks should not be overlooked.
Contrary to what some institutions might believe, pursuing megadonors requires a substantial amount of time and resources — well worth the investment if it pays off, but potentially crippling if it does not. An excessive focus on megadonors can come at the expense of other, more reliable donor segments, such as major donors (defined as those who may give up to $10 million over the course of their lives). This can be devastating in the long term as major donors have historically been more willing to fund the needs of a non-profit institution with a mix of unrestricted and planned giving assets, as well as some direct program funding.
Megadonors, generally speaking, are often more interested in experimenting with novel strategies or focusing on a singular goal, which can divert funds from the non-profit's broader mission objectives and operational needs. If the non-profit does not have a well-established model, one that is clearly communicated and appeals to the megadonor, it's possible that the demands and preferences of just one or two megadonors could radically transform its focus, particularly in the absence of a solid financial foundation provided by reliable major donors.
Achieving a Sustainable Balance
Non-profits cannot afford to ignore the power and potential megadonors hold. However, they must recognize that megadonors are just one — very large, admittedly — piece of the overall philanthropic pie.
A successful non-profit will approach this funding environment holistically: recognizing the opportunity megadonors represent while protecting against the risks by diversifying among various donor segments. In order to do this, the non-profit must plan for donor engagement at every level of giving and make an effort to consider both short- and long-term needs.
Have a Well-Thought-Out Plan for Each Segment
In order to integrate megadonors into institutional fundraising plans without ignoring major donors, a non-profit must put a significant amount of effort into project management to ensure that they are able to deliver the solutions and attention necessary to maintain these relationships. Devising a specially tailored plan for each segment — indeed, each individual donor — is imperative to ensure that the non-profit is funded properly and doesn't fall victim to distractions or scope creep. The non-profit must create a sound business model with a measurable impact in order to assert itself appropriately.
Invest in the Future
Non-profit organizations will find themselves at a serious disadvantage down the road if they do not create fundraising programs targeted at engaging mass affluent and younger givers. Investments in technology and a data-driven approach to fundraising can allow organizations to gather important demographic data, identify high-potential prospects in these segments, and determine the most efficient and effective way to reach them.
Identify the Right Vehicles
Donor advised funds (DAFs) can be a great way to attract unrestricted gifts. In 2018, the payout rate for DAF assets was 22%, more than four times the required minimum distribution for families and institutional foundations.5 Self-sponsored DAFs not only provide a programmatic and possibly unrestricted flow of cash to the non-profit — they can also yield significant data on donors' giving habits.
Life-income vehicles, such as charitable remainder trusts and charitable lead trusts, can address the needs of the non-profit while also helping early-stage givers who want to increase their giving but are uncertain about their ultimate level of commitment.
Whether the emergence of megadonors represents a new era of philanthropy in which their big bets create an environment conducive to the resolution of the world's biggest and most intractable problems remains to be seen. In order to realize this dream, however, non-profits must be prudent, sensible and cautious in their approach. They must be the stewards, guiding this new class of donors in the right direction while taking steps to ensure long-term sustainability. It's the responsibility of the non-profit to seek, educate and partner with its donors — mega and major alike.