Private Foundations – What to Do About the REAL Competition That’s Beating Your Nonprofit

Your competition is not other nonprofits. Yes, perhaps there are a few others similar enough to your mission to cause a handful of donors to wrestle over which one to support. But your real competition, the ones taking billions in donations and bequests out of the hands of nonprofits, are the private foundations.

Private family foundations typically arise after a wealthy person dies, if that person stipulates in their estate plan that a foundation must be created. The typical purpose is to preserve their legacy by donating portions of their invested assets to various causes over many years, often around particular themes or areas of need.

The foundation will usually be controlled by the family, at least at first. Whoever controls it must follow the founder’s instructions for how to run the foundation, the processes for deciding how and where to distribute funds, and other details.

And while foundations are typically self-funded at first, many of them end up doing traditional fundraising and accepting donations, often from other wealthy individuals. And that’s where they compete with nonprofit organizations like yours.

How Much Money Gets Donated to Private Foundations?

Let’s look at a few statistics for private family foundations.

$45 billion donated each year

Recent data revealed that private foundations received 11% of all donations in the US, adding up to over $45 billion. That’s a lot of money. Imagine if nonprofits could compete more successfully against these foundations and manage to siphon away just $5 billion of that each year.

Just $5 billion. Yes, it’s a small percentage of the total donated to foundations. But $5 billion in additional donations spread across numerous nonprofit organizations every year – that would make quite a difference!

One third of wealthy donations go to foundations

More statistics on private foundations reveal that almost a third of all donations from the wealthiest donors go to private foundations. Again, if you could reduce that 33% down to 25% and motivate those donors to give to nonprofits instead, that would represent very large amounts of money.

Nonprofits are losing to foundations

IRS data reveals that, though charitable giving has remained relatively flat at about 2% of GDP each year, private foundation wealth has grown at more than twice that rate.

6 out of the 10 largest fundraising “organizations” are DAFs

There’s a ton of money being set aside and invested in Donor Advised Funds, as this data reveals, leading to them becoming six of the ten largest fundraising “organizations.” Now, about a fifth of that money gets donated each year, but that just shows how much has been set aside with this tax-friendly charitable giving vehicle.

Many of those DAF gifts go to private foundations instead of nonprofits.

Is your nonprofit open to receiving donations from DAFs? Do your gift officers prioritize it? If not, they’re leaving huge gifts on the table, and more importantly, they are not serving donors who want to give in that way.

Why Do Wealthy People Prefer Private Family Foundations?

This is THE question you must begin wrestling with if you want to start beating your competition more often. Because what your organization offers to wealthy donors must be better than what they believe they could get from a private foundation.

Does this all sound a little too capitalistic?

That’s because donating is just like making a purchase, in one key aspect: Both are done out of partial self-interest.

It may not seem that way, because giving is inherently generous and non-selfish. But the experience of giving, the feelings you get before, during, and after giving – these are also one reason why a person gives.

If a private foundation gives a donor more value than a typical nonprofit does, then the donor will give to them.

What is ‘value’ when we’re talking about giving a major gift? For any given donor, value could be:

  • Freedom – the ability to do what they want with their money
  • Impact that matters to them
  • Authority – having a say in where their money goes and what it achieves
  • Ingenuity – finding creative ways to use their money
  • Flexibility – not boxing themselves in to one commitment that can’t adapt to new information
  • Recognition – being commended and honored for their impact
  • And many more

If you study those examples of value, you will quickly conclude that a nonprofit can deliver all of them for any major donor, just like a private foundation can. So the foundations don’t have any inherent advantage over you. The problem is, too many nonprofits just fail to deliver value that matters to major donors.

DAFs offer a great example of this. Remember the earlier data about these making up 6 of the largest 10 “organizations”? Why do wealthy donors use donor advised funds? Because they provide flexibility, freedom, and ingenuity with how, when, and where they use their money.

Accepting donations from DAFs is a way to give value to major donors. If your nonprofit shuns DAFs out of some strange set of philosophical beliefs, then you are neglecting a key tenet of major gifts fundraising. And you will lose out to the private foundations more often than you should.

How Organizations Can Compete and Win Against Private Foundations

Winning this battle isn’t as much about strategy as it is about your internal organizational culture and beliefs. To beat the private foundations, you have to think differently about fundraising and about how your organization structures itself and operates.

Here are six ways to change your culture and deliver better value to wealthy donors.

1. Agree to Focus Everything about the ‘One Big Thing’

This must happen first, or none of the other ideas on this list will work.

Dr. Russell James, an award-winning fundraising researcher into major gifts, a frequent contributor to this blog, and a key component of our primary online course, has concluded after decades of research that advancing the donor’s hero story is the most important job of a fundraiser.

He did not come to this conclusion lightly.

This matters more than anything else a gift officer does. Why? Because when a donor gets led and empowered to move forward with the version of themselves they want to become, they feel great about whatever has led them there. When that includes giving to your organization, you win.

This idea of the donor’s hero story forms the centerpiece of Donor Story: Epic Fundraising, our signature online course. This is the last major gifts fundraising course you ever need to take. It will revolutionize the way you see and do fundraising.

Even better, your whole organization can take the course for almost the same price as if you took it alone. We offer this deal because we know how important it is for your whole team to rally around this idea of the one big thing. Learn more about the Epic Fundraising eCourse.

2. Re-Imagine the Fundraiser as a Guiding Sage

Gift officers are not beggars. They are not cogs in a wheel. They do not follow scripts like robots and treat every donor the exact same way, trusting in some unproven methodology dreamed up by PhDs who have never raised a dollar in their lives.

When you perceive the donor’s experience as a journey or a story rather than a transaction, your role shifts to one of a guiding Sage. Many of the greatest stories ever told include a sage who leads, guides, and empowers the hero to grow and become the person they were meant to be and fulfill their destiny.

A sage is a trusted mentor, an advisor, and a guide. When the gift officer approaches their work with that mindset – with the donor playing the hero role in the same story – everything you do will change.

Here’s how Dr. James describes what it looks like to be a guiding sage fundraiser.

3. Administrators Must Recognize the Fundraiser as Sage

Administrators struggle with this idea, because they tend to see donors as dollar signs, and they are driven by the needs of the organization, not the concerns of the donor.

This is a HUGE disconnect, and it’s a primary reason why so many organizations lose out to private foundations for big donor dollars.

The administrators must learn to recognize and understand what it means for the gift officer to act as a guiding sage. This means they treat each donor differently. It means patience and timing, not rushing or pressuring. It means relationship. Giving value. Helping the donor make decisions that mean something to them. It means being a trusted friend.

Is this process slower than the ‘usual way’ of raising money? Well, that’s very debatable, because if the usual way doesn’t work very well, chewing up and spitting out prospects by the dozens but occasionally getting lucky and scoring big, then a different approach that seems to move slower but raises more money actually works better.

Administrators need to buy into this and let the fundraiser completely inhabit the role of the Sage.

Once you achieve these first three steps, the internal culture across your entire organization will begin to shift, and you will be positioned to start competing against private foundations for wealthy donors.

4. Show Administrators that Private Foundations Are the Real Competition

Most aren’t aware of it. Show them the statistics from earlier. Tell them that the majority of bequest dollars actually go to foundations and not organizations. Tell them they are losing to private family foundations. Make them feel some urgency.

If donors give to private foundations, then they aren’t giving to your organization.

Providing value to donors might seem like a needless hassle and a waste of time, to an administrator. But if they realize that this is the best way to beat out the foundations for big donors, they will be more likely to buy into this new approach to fundraising.

Right now, the competition is providing more value to wealthy donors. They are attracting them, retaining them, and keeping them from giving to your administrator’s work. Something needs to change.

5. Fundraisers Must Bridge the Gap Between Donor and Administrator

It’s best if these two never meet. Each are on their own journeys and walking through their own stories. Their stories rarely overlap. It’s like two parallel lines. If they ever do need to converge now and then, the fundraiser is the person who should steward that convergence. That way, the administrator never talks to the donor.

Why is this better? Because they speak different languages – ‘donorish’ and ‘adminese.’

Yes, that’s a silly way to put it of course. But donors care about very different things than what administrators care about. Administrators focus on budgets, needs, urgent situations, personnel, and all sorts of organizational challenges. Real stuff. It matters.

But those aren’t the reasons donors give. And if you try to make those become the reasons, you will drive the donor away to the foundations, because the foundations focus on making an impact in very tangible ways. And that’s what donors want to be part of, because it advances their hero story.

The fundraiser must be able to communicate with both parties – understand the organization’s needs, and then translate those in ways that will resonate with the donor.

6. Administrators Must Include Fundraisers in Strategic Planning

Fundraisers are not just tools or employees. They aren’t stubborn hindrances when they complain about how an administrator’s set of fundraising targets isn’t realistic.

Fundraisers as Sages know their donors and prospects very well, and they are leading them along at paces appropriate to each one.

The administrator needs to appreciate and respect the fundraiser’s pivotal role in the organization, and as much as possible, involve and include them in strategic planning discussions. Fundraisers should not be dictated to, assigned a random number of donors to talk to, or given quotas for how much money to ask for and raise each quarter.

A fundraiser could have a great month and raise $0 that month if they spent the whole month successfully moving a couple dozen major donors along in the cultivation process.

Their expertise and established relationships must become part of the planning process, not just a means to an end.

For the administrator to succeed in their own story of leading the organization, they must cooperate with and empower their fundraisers to deliver value and meet donor needs.

See why Dr. James says fundraisers raise more money when acting as a guiding Sage

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