Does Size Matter Most in Philanthropy?

(Photo by iStock/iStock/vkbhat)

One of the most fundamental distinctions we tend to make in US philanthropy is between individual and institutional donors. Individual donors include both wealthy philanthropists and millions of average Americans who collectively donate billions of dollars annually to charitable causes. Institutional donors consist of foundations and other formal entities that financially support charitable causes and programs—often through a grantmaking process. The dichotomy between individual and institutional giving is so ubiquitous that the sector is practically built around it, with most websites, tools, databases, and research initiatives focused on one or the other. Even the rare attempts to include both—such as Giving USA’s annual report—treat individuals and institutions as distinct categories. But what if this distinction is not as clear-cut as we assumed? Our research suggests that in some cases donor size may be a more important lens for understanding giving behavior than the long-standing distinction between individual and institutional donors.

Recently, Candid, GivingTuesday, and Network for Good partnered on a year-long project in which each organization shared record amounts of transactions-level giving data. The goal of this partnership was to examine the potential and the challenges involved in combining vastly different data sets, and to draw collective insights about how capital flows to nonprofit organizations. The results of this exploration can be found in our recently released report, Dollars and Change. While working on this project, we were surprised to learn how often trends across individual and institutional giving mirrored each other. For example, average donation size for both donor categories increased in recent years. Moreover, we found that regardless of whether donors were individuals or institutions, donor size had a strong impact on the giving picture. In this article, we highlight some of these size-related trends—including original analyses not included in the report—and hypothesize why donor size matters and what these findings mean for the sector.

Large donors account for a large percentage of total charitable dollars and are swayed by economic conditions.

For both individuals and institutions, there are far more small donors than large donors, but large donors disproportionately influence giving trends. For example, our research found that most individual donors gave $100 or less each year on average; however, the 0.3 percent of individual donors who gave more than $50,000 a year accounted for 45 percent of total dollars donated by individuals. We found a similar pattern with institutional grantmakers—the top 0.1 percent of grantmakers accounted for, on average, 36 percent of total grant dollars.

Overall, we found a positive relationship between economic conditions and giving for both individual and institutional donors—when the economy seems to be doing well, dollars flow more freely. At first, it seemed that institutional donors were more influenced by economic factors than individual donors, but a deeper dive suggested that this was at least partly driven by donor size.

Economic indicators like the stock market and disposable household income were not statistically significantly related to giving for either small individual donors (those donating less than $500 annually) or small institutional grantmakers (those giving less than $100,000 annually). But as individual and institutional donor size increased, the relationship between the economy and giving strengthened. Among individual donors, the largest donor category (those who gave more than $50,000 annually) had the strongest connection to economic indicators. Similarly, giving by the largest institutional grantmakers (those awarding more than $100 million annually) was most aligned with economic conditions.

It is not surprising that institutional grantmakers are influenced by economic conditions, as the IRS requires private foundations to pay out 5 percent of their assets value annually to charitable causes. Given that assets tend to fluctuate with the stock market, such institutions likely need to donate more money during economic upturns to meet this legal requirement. Individual donors do not have to adhere to the same rules; however, larger individual donors are likely to have significant stock market investments which influences their ability to give. Moreover, while individual donors are not tax exempt, they do receive a tax credit for charitable donations. Therefore, large individual donors may tend to act like private foundations, as they have some external incentive for making contributions.

Large donors are more focused on health and education while small donors are more focused on human service organizations.

Donor size also seemed to be a strong predictor of where the money goes. Overall, results suggested that institutional donors tended to contribute the largest proportion of funds to education and health nonprofits (based on recipient organization NTEE codes), while individual donors were most likely to contribute to human service nonprofits (e.g., youth and family services, housing, food pantries, job support, recreation).

However, again, more nuanced analyses suggest this overall pattern was somewhat driven by donor size. Small donors, both individuals and institutions, were more likely to give to human service organizations. Large individual and institutional donors, on the other hand, were more likely to give to health and education nonprofits.

 

Drawing on previous research, we hypothesize that this pattern of results may be due, at least in part, to the different communities these donors identify with, along with different motivations for giving. Scholars have long argued that donating to charity is not a purely altruistic act, but rather one driven by a mix of explicit and implicit self-serving tendencies. One implicit motivation is known as the “warm glow”—the warm fuzzy feeling the giver receives for helping others (along with improved self-image, self-esteem, and social image). Givers tend to experience more “warm glow” when they give to their own communities, people they know, or people they deem deserving of aid.

For the average individual donor, giving to human services organizations and religious organizations likely produces a strong warm glow experience. However, very wealthy donors—whether individual or institutional—may have more personal experience and exposure to education and health institutions and feel more convinced of their worthiness.

In terms of giving patterns, there are striking similarities between large individual donors and small institutional grantmakers.

Further analysis of giving by subsector also revealed that the giving profiles of large individual donors and small institutional grantmakers looked very similar. In fact, these two groups shared more similarities with each other than they did with their counterparts. That is, large individual donors gave in ways more like small institutions than other individuals and small institutional grantmakers gave more like large individual donors than large institutions.

This finding seems to suggest a blurring of the line between large individual donors and small institutional funders. Intuitively, this makes sense, as many small foundations, such as family foundations, are started by one or more wealthy family members who want to give back to their community or support causes they are passionate about. Under these circumstances, individuals within such foundations are typically giving away their own money. This is not unlike wealthy individual donors, who have chosen instead to give away their wealth more directly, without the mechanism of a private foundation. In both cases, the donors are likely of similar social and economic status, and actively involved in how their contributions are disbursed.

What do these findings mean for the social sector?

Taken together, these findings suggest that donor size is a significant factor in trying to understand donor behavior—regardless of whether the donor is an individual or an institution. Additionally, there seems to be some commonalities between large individual donors and small institutional donors. These findings might be an early signal that the long-standing dichotomy between individual and institutional donors has become dated, particularly as the line between individual and institutional donors continues to blur. High-net-worth individuals are increasingly
choosing to give through vehicles other than private foundations—like donor-advised funds or Limited Liability Companies (LLCs). But, similar to foundations, some may hire philanthropic advisors, issue experts, or staff to help them be strategic and impactful in their giving.

The interplay between donor size, donor type, and donor motivations suggests that nonprofits need a wide range of engagement strategies and approaches—and this may seem daunting. However, our findings also suggest possible fundraising strategies. For example, during economic downturns, nonprofits may want to prioritize reaching out to smaller donors, whose giving tends to be less affected by economic turmoil. The reality that large donors are most affected by the economy means that the best time to reach out to them is during economic upturns.

It may also be helpful for nonprofits to consider that small institutional grantmakers are often similar to individual donors in their giving patterns. Nonprofits may want to consider how to cultivate the “warm glow” for smaller family foundations—for instance, by highlighting shared commonalities (of geography or mission) or offering public recognition.

These findings also suggest opportunities for large donors to become more effective. For example, increasing (rather than decreasing) funding during economic downturns would help sustain nonprofits and ensure that help gets to communities when they may need it most. Additionally, large donors may want to consider whether there are communities or causes that they are less familiar with that could benefit from their support.

Finally, these results suggest directions for future research. There is scarce information about whether the warm glow impacts institutional grantmaking, and further research is needed about the role it may play in grantmaking decisions. Additionally, more research is needed to further explore the extent to which the line between individual and institutional donors is dissolving. As the social sector continues to evolve and become more complex, is it time for us to retire this dichotomy?

Read more stories by Cathleen Clerkin, Grace Sato & Edward Moore.