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Tapping the Elusive Donor Pool of “Rational Optimizers”

Scott Thomas, Arbor Brothers Co-founder

 
Scott co-leads Arbor Brothers, an engaged philanthropy organization which provides funding and consulting support to high-performing nonprofits addressing the root causes of poverty in the greater New York area. Before founding Arbor Brothers in 2010, he taught middle school mathematics with Teach for America and managed energy investments at Lehman Brothers and Neuberger Berman. He holds an engineering degree from the University of Michigan and an MBA from NYU. He also proudly serves on the local and national boards of Summer Search, a youth development organization.


Tapping the Elusive Donor Pool of “Rational Optimizers”
 
Can a laser focus on outcomes help nonprofits better serve clients and unlock new sources of revenue?  At Arbor Brothers, we believe organizations which clearly articulate their impact can attract substantial support from an untapped pool of major individual donors, whom we term “rational optimizers”. Herein we’ll characterize this demographic, outline some best practices in outcomes-focused communications and offer evidence supporting the fundraising potential of this approach. To be clear: we acknowledge that our hyper-local sample of observations is largely drawn from the education sector and that many high-performing nonprofits already incorporate this tactic. 
 
For a little context on the unique New York City nonprofit landscape in which we operate: there are more than 38,000 registered charities across the five boroughs competing for philanthropic support. For new and growing organizations, fundraising in this environment is an acute challenge. Since the 2008 financial collapse, the grantmaking budgets of traditional foundations have been trimmed and are now largely committed to incumbent grantees. On the corporate side, financial support is often tied to employee volunteerism and marketing imperatives – an awkward fit for many organizations.  This leaves development teams scrambling to secure support from individual donors. Unfortunately, these efforts are often scattershot and resource-intensive, as acquisition and stewardship costs are not dramatically different between $500 and $5,000 donors.  Inevitably, this massive differential in financial returns per unit time invested pushes savvy fundraisers to seek out and cultivate upmarket donors – those with the capacity to annually underwrite gifts at the $5,000 to $50,000 level. Our experience suggests there is a large population of highly-discerning donors with untapped capacity in this range: the rational optimizers.
 
So who are these folks? Most are mid-career professionals, between the ages of 30 and 50, often working in finance and related industries.  It’s challenging to put a hard figure on their aggregate giving capacity, but consider (1) they are earning most of the city’s wages:  the financial services sector accounts for 40% of all salaries paid in Manhattan; and (2) there are a lot of them out there: almost 400,000 millionaires ($1M+ in liquid assets) and 3,000 multi-millionaires ($30M+) living in New York City alone.  Politically, they tend to lean right on fiscal matters but are often progressive or libertarian on social issues.  
 
Though they may share demographic characteristics with similarly affluent peers, what sets rational optimizers apart is their giving mindset. As they become financially secure and consider establishing or growing their philanthropic budget, their forays into charitable giving often create an unflattering contrast to their workplace experience in which goals, risks and outcomes are largely transparent and quantifiable.  With little information available to compare nonprofits and little visibility into results, these donors either end up sitting on the sidelines or giving in scattered, reactive spurts.  A recent Chronicle of Philanthropy survey corroborates this, noting the number one reason donors say they don’t give more is a fear their gift “won’t be used wisely”.  These folks do not feel the need to attend fancy dinners or to have their name on a building, but they do want to be assured their donation will effectively translate into the change they want to see in the world. The good news for nonprofits already focused on generating outcomes is that this is largely a problem of story-telling, not the story itself.
 
How can nonprofits better communicate to attract these reluctant donors? The basics are the same: establish a personal connection between the prospect and the organization’s mission, staff and population served. Crucially, for rational optimizers, this emotional engagement is necessary but not sufficient. Many of these folks spend their working lives marshaling their emotions and allocating capital by analyzing the relative risks and returns of competing opportunities. Whether they ultimately make decisions based on instinct or not, they often require a scaffolding of logical analysis to support their decisions. This higher bar makes them especially judicious in their deployment of scarce personal resources and is the characteristic we see as key to unlocking their philanthropic potential. To clear this bar, we recommend nonprofits endeavor to address three basic topics in a very particular way:
 

  • This is What We Do – A clearly articulated logic model or “theory of change” which illustrates plausible connections between the profile of the population served, the duration and intensity of the intervention, and the range and permanency of the expected outcomes.  Crucially, these outcomes should describe what has changed in the participants, not how many were served (or other output-counting measures). 
  • This is Our Track Record – Evidence-based support for the organization’s theory of change.  While gold standard academic techniques such as randomized control trials may be cost prohibitive, collecting data to document change and dispute the effect of selection bias (where would this person be if  he or she had not  participated in our program) is not optional.
  • This is What it Costs – A succinct description of the organization’s value proposition, or cost per outcome (again, not cost per participant, which is an output).  For example: “After six months of job training, we can place an unemployed high-school graduate in a $30k+ salaried position for a fully-loaded cost of $7,500.”  Optimally, these figures should transparently describe nuances such as the treatment of program dropout rates, matriculation/placement rates and overhead allocation.  

But can this approach really help raise more money?  It’s early, but we are encouraged by the results we’ve seen so far.  Over the last three years, Arbor Brothers has aggregated and deployed more than $2M of capital from a group consisting primarily of rational optimizer donors. These funds were raised explicitly to help cultivate and communicate the outcomes focus of our grantee portfolio.  In 2012, excluding our support, our portfolio of grantees raised $6.6M.  In 2013, the same portfolio is on track to raise approximately $9.7M. This incremental $3.1M implies a 46% year-over-year growth rate, and much of this revenue comes from increased success with this rational optimizer demographic (including some foundations with a similarly rigorous approach).  In many cases, our initial $50-65k grants were the largest single investments our grantees had secured to-date; now many of them have a coterie of these discerning supporters at or above these levels.  
 
While we acknowledge that this approach is not universally replicable, we do believe this small but very successful sample supports our hypothesis around the capacity and standards of this donor pool.  As an aside, we should emphasize that the real impetus behind foregrounding outcomes is to help establish an organizational polestar, guiding nonprofit leaders in their relentless efforts to refine programs and align resources to better serve their constituencies. We would be recommending this focus whether it brought in an extra dollar or not.  Thanks in part to rational optimizers, we now know it can do that as well.   

 




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