Episode 86: Troubles with Donor Concentration

Welcome to another edition of "Around with Randall" your weekly podcast making your nonprofit more effective for your community. And here is your host, the CEO and Founder of Hallett Philanthropy, Randall Hallett.

It's great to have you right back here on "Around with Randall." Today's conversation actually is one in which we talk about the idea of diversification, or in the contrast, the issues of donor concentration. I was, as I try to do keeping up with the nonprofit world, doing some reading and came across an article from the "Chronicle of Philanthropy," and this was a story about nonprofits who do unbelievable work in gender violence. In the fact that an organization, a funding organization, foundation had decided to make a major change which led to all kinds of consequences and it got me thinking about whether it's your organization or even if it's my consulting business, or if you're a major gift officer, your portfolio, this idea of how we diversify. Which leads to conversations around pipeline. It leads conversations around, you know, engaging in stewardship opportunities with donors.

There's a lot here which I thought to be fairly interesting in it, particularly as we move more and more as Giving USA is telling us, towards less people making more of a difference. You've heard me say it. It used to be the predo principle 80% of our dollars came from 20% of our people. Nowadays the world I live in, it's 5% making up 95% percent of the dollars. So we're concentrating on fewer people but that has consequences.

The story in the "Chronicle of Philanthropy" was from May 26th, and it dealt with an issue that the Novo Foundation, which is a huge funder of these issues that are related to sexual exploitation, gender violence, have supported foundations across the country. In fact, one estimate believes that 96% of all funding in this work came from this one foundation the foundation for whatever reasons chose to reduce its funding to this specific area dramatically, even almost halting it, and it left nonprofit organizations in a terrible bind because they had become dependent on it for years and years. Places like The Chicago Alliance Against Sexual Exploitation, Sanctuary for Families in New York City are just two examples, had become very dependent on this particular funding and it caused their organizations massive problems in terms of services to that were provided. Housing. How are they going to pay for X,Y, and Z? These organizations had to make very strong and immediate changes to their process.

So what does this have to do with you and with the nonprofit world? Well let me start with the idea of smaller nonprofits. Many smaller nonprofits do depend on a very few number of major donors, and if one of those major donors were to leave you have a problem. In my world, consulting, as I have built out my firm and it's gone very well, I couldn't be happier, but I'm always aware are there one, two, or three clients that are becoming an increased number of percentage of the business. Or if you're in your major gift work or you're part of your role as major gifts, or leadership, annual giving, and you have a very few number of people that you're depending on to make your goals in the for profit world, this is called client concentration, meaning that you've gotten to a point where you have a very few number of people that make the objective possible and that if there's a fallout or an issue or something doesn't come to fruition, there's catastrophic consequences.

In about three minutes we're going to talk about what are some things you can do to ensure you don't have what I'll classify as donor concentration. You don't get into a position where you realize it gives you some numbers and some strategies. But I think it's important to realize how this happens because it's not done with malice or or poor planning or bad thought. It kind of happens, and this would be true in my business, and I'll give you an example here in a couple minutes, or it could happen in the nonprofit world. Might feel or sound something like this in my world. It's a client in your world. It's a donor that you get a new contract or you get a new donor, a new gift. And they really love the work that you're doing and maybe you've even renewed them very quickly or upgraded them in the donor process to give a second gift, a third gift, and it's growing, and they make their contributions on time. And in the for profit world they pay on time so it's simple. It's easy. We don't have to track them down. You send them the bill, you send them the reminder, check comes in. You love working with them. They're, you see the value in in in my world, in the for, in the consulting world it's, gosh they're doing really well and they they are are seeing successes and they love the fact that they're able to raise more money in the nonprofit world.

If you're a gift officer, a small nonprofit, they see such value in what's being done and they tell you how much of a difference it's making knowing they can help other people. So you love to work with them because the relationship is happy, positive, and and mutually beneficial. And they, through their generosity in the for profit world, through their business, you're, there's growth. There's more things that you can do. There's a better bottom line. You meet your metrics.

It's human nature to want to move towards those relationships. Isn't it just common sense that if people are happy and things are going well we want to do that kind of work or work with those kind of people? And all of a sudden, it goes from that first gift and that renewal and all of a sudden it's ten percent of your goal and twenty percent of your goal. Or maybe it's twenty percent of the dollars coming in. All of a sudden it's thirty and things are going well and they're increasing their their donative intent, increasing their gifts, increasing their business, and all of a sudden it's 50%.

I've lived through this where I was part of a process where we had a a situation, client and or donor concentration that all of a sudden 30 to 40 percent of the income coming in was from one place and that place decided to that organization, decided to quit funding us. And it was scary because there were massive changes to the way we operated. We had to make very quick decisions. They weren't strategic. They were just necessary. It's painful. I think we've maybe lived through this. I have somebody that I have a great deal of respect for who owns another consulting company, and he and I have spent some time chatting as we've gone through the pandemic. As the pandemic started he had a number of large clients who just called him and said contract's over. Well we got a 60 day out. Now you're not listening. The contract's over. Our organization is done until we can figure out what's going on with Covid. And he had to lay off people and people looked at him and said we depended on you, and he feels it. Still affects his decision-making today. So the reason I tell you that story is is that I think in some ways we've lived through these kind of decisions, whether it was the great recession, where people had to make immediate decisions, or certainly with the pandemic. There's been these moments where bad things have to be decided. The question is, are there things we can do to mitigate that issue.

And here becomes the tactical. So let me give you some rules of thumb that I think can be helpful in the nonprofit world that might benefit you, and this can apply to an organization. So maybe you're a smaller nonprofit. If you're a large healthcare and you've got five, ten thousand dollar, ten thousand donors a year maybe not quite as applicable. But if you're a major gift officer and you're putting all your eggs in one or two baskets each and every year, eventually that's a problem. So let me give you some rules of thumb. This idea of donor concentration would mirror the idea of client concentration, is that if any one person makes up anywhere close to 30% of your goal, or if three people make up 60% of your goal, your concentration is probably too intense because that means if one for 30% or one or two of the sixty percent were to fall off you have a catastrophic challenge ahead of you to make decisions, to make goal, or to make payroll, or to serve the needs of the community in the nonprofit way that your mission derives.

Direct diversification is the term that we need to be thinking about in this context because diversification is the idea of spreading it out. Diversification, we think about most often in the investment area, how do we diversify our investments in a way that one stock can't bring all of our investments down catastrophically? And the same principle is true if you're investing all in stock A and it drops 50 - 70 percent. You've lost 50%, 70% so they want you to spread that risk out. And the same is exactly true, we talk about donors.

So first and foremost is to look at the percentage of the your top donor or the top three, top five, top seven. Is it so large that if one or two of them fell off that it would cause your organization, or you as a gift officer, a problem? So the first thing some analysis. The second thing is, okay then how do we diversify? How do we get a larger group of people to support the cause we believe in? So there's a couple things that you can do in this process. The first thing is realizing that diversification, the idea of lessening your donor concentration, is an attitude. It takes work. Remember, I walked you through the sequence of maybe how this happened that you you know things started afresh, and they renewed and they gave more money and you love working with them. I'm not saying run from those people. Keep those people. But you want to find other people like them and that takes an attitude.

I've done a number of podcasts on pipeline and I talk about it constantly because no matter if you're a principal gift officer and I think about one former client who I worked with. She was just the best fundraiser. She's retired now. She had a portfolio of 15 people but I kept telling her hey, you know you're... didn't use this term but this donor concentration as a principal gift officer, you only make three asks and none of the three come to bear. Where are you at? And she and I would go back and forth about this concept, so it's an attitude. You've got to be willing to go into the pipeline to make new qualification opportunities. Maybe that's a first-time grateful patient. Maybe that's a first-time alum. Maybe that's a referral from the board, which we're going to talk about here in a second, in terms of details. An attitude that you are going to spend time on an annual basis, whether that's broken out monthly or weekly, on meeting new people, telling your story, in the mission that you believe in, the organization, and what it does to ensure you can gather more support as you go along. So the first is an attitude. You got to be wanting and willing to do it.

Number two is that you don't have to solve the problem tomorrow. Start small. Set out some incremental goals. Don't try to find three other people that match this person that you've already developed a relationship. Just like that, don't think you can do that because that's not how you got them in the first place. It took time. You did certain things. You made your gift officer, you were, you stopped by their house with certain types of stewardship reports and updates. you would send them emails. you would invite them to coffee. It took time to develop that trust and that rapport. Attitude gets you in the direction, starting small and building gets you towards results. So don't think you're going to solve this day one. Create a process that over a short period of time. You're doing incremental steps to grow the the number of people that you're talking and dealing with.

The third thing is three, four, and five really is really trying to figure out okay where am I going to do this? Use this attitude and start small and build relationships. So the first place is, if you're a major gift officer 10 my experiences is that many donors hang out, run with, associate with people that are like them. If you have two or three major donors that are carrying a weight of a huge percentage of your portfolio, ask them for referrals. You love working with our organization, our mission. I love working with you. Are there other people that you've spoken to with the country club, at the yacht club, at the wine tasting, book club, whatever, who have a similar passion to you? I'd love to meet them. It seems really elemental in its process or thought, but actually, I don't see it done very often. So utilize that. Donor's connections. And if they're a foundation are there, do they know of other foundations that do similar work? Just because they're an organization not an individual doesn't mean you can't talk to the people in that organization in the same way.

The other is your board volunteers. Asking them, I'm doing more and more conversations, work with boards about how they look at their makeup. And I use a social networking map to help them understand that our communities are made up of smaller social gathering groups, country clubs, yacht clubs, wine clubs, book clubs. I was just doing a board retreat and somebody says we've got an enormous vintage car group. I think that's all of these are in the community that vintage car group's a great example of one piece of it or part of that community. Do you have representation on that board? How do you get into that? And the same is true of these trying to figure out how to reduce your donor concentration. Maybe it's your donor. Maybe it's your board. Maybe it's other volunteers asking them, are there other people who who have similar beliefs or have similar interests? I'd love to be any more people so that it gives you a chance to tell the story and find those new opportunities. Attitude leading to small starts, leading to assistance from those that are closest to you.

The fourth is something that we struggle with. At least I do. I'm not against events but if events are used well they can be great cultivation and introduction processes. But the work in an event when it's done right is done pre-post not during. How do you get the right people in the room so you can meet them? How do you follow up with them after the fact? Yes we want events to make money. Yes we want to make a stronger ROI than 50 cents on the dollar, which is kind of what you hear in the industry standard for events. But at the end of the day if you have such high donor concentration maybe you need to be out in the community doing some more things, telling your story, sharing the value, sharing the vision, explaining what difference you're making but making sure the right people are in the room when that happens.

The last is marketing. How do you get out into the public whether it's your own newsletters or can you utilize free media such as the news to tell the kind of stories that are going on so people go gosh I didn't know we did that, had that in this community. How do we get involved with that? That becomes a long-term strategy about how we communicate using social media if you are a support foundation, either in education or healthcare environment. Other places, how do you leverage the marketing that the bigger organization is doing? Remember that if you have too many people who don't know what you do you can't tell the story in the right way of the value that you bring to their community, and so this idea of marketing communication, either through free or planned processes are really important.

Look at your numbers. See if you fit that rule of thumb. One donor is 25% of your portfolio or your organization's funding three, four, five people are 40, 50, 60 percent or more, that's going to lead you into some conversations. And it's attitude, focusing on that pipeline, focusing on how we're going to get out and help ourselves, starting small with these relationships, looking for those referrals from your donors and your volunteering boards maybe an event to get the right people in the room. The pre and post work, and finally, marketing in an effective way. If you do those things you actually will benefit yourself greatly.

Donor concentration - don't allow yourself to be too dependent. I'm too small of a group. Much like what was happening with the great work that happens across the country with gender violence, a lot of organizations depended on one small donor who is funding tens and hundreds of millions. They made a change and that's had a deep effect on people's lives who need this kind of assistance.

Don't forget check out the blogs on the website, hallettphilanthropy.com. And if you want to communicate with me, podcast at halettphilanthropy.com. Glad to chat with you about a podcast, you have a subject or something of that matter, let me know. And if you're listening to this on one of the downloaded sources on an iPhone or Google phone please leave a rating, or if you're on YouTube and looking at this face leave a rating, share it with a friend. They might find great value in it. Don't forget, you do important work. It's really valuable. It makes a difference in people's lives, and I hope you feel that every day because there's a lot of challenges out there but the good that happens in nonprofit work, the idea of philanthropy, love of mankind, should be uplifting when you show up to the office. Don't forget my favorite saying, some people make things happen, some people watch things happen, then there are those who wonder what happened. We are people who make things happen we partner with other people who want to make things happen, that can fund what we do and we help those, and help things that are most important, that are wondering what happened, and that's a great way to spend a professional life, and I hope you feel the same. I'll look forward to seeing you next time right back here on "Around with Randall." Don't forget, make it a great day.