10 Tips for Endowments

We work with a mid-sized community center here in Colorado that is running a budget of about $500,000. Recently, a local foundation offered to help them fund an endowment. The community center didn’t want to pass up the opportunity, so they spent more than 18 months raising $600,000 to get a $400,000 match for a $1 million endowment.

The jury is still out as to whether or not it was the right move. The process of procuring the endowment dollars totally diverted the center’s attention away from the annual campaign and caused a lot of confusion and hesitancy among donors – confusion and hesitancy the center is still trying to mitigate. And although they will now receive a sweet $50,000 every year from investments, there’s a cool $1 million that the center cannot access.

Most nonprofits feel it’s important to institute endowments as a way to build long-term sustainability; however, not all nonprofits are ready to do this. In a recent survey by the Chronicle of Philanthropy, 26 of the 67 nonprofits they questioned made a conscious decision NOT to raise endowment income. Most of these nonprofits wanted their dollars going into direct services rather than investments, and some of them said that investing money was not in line with their mission.

But many nonprofits are in fact ready to institute an endowment – they’ve reached the mature institutional stage of their development and have the capacity to take on this endeavor. For those of you at this stage, here are some tips we’ve gathered over the years that will help you decide if setting up an endowment is worth the time and effort.

  1. Timing is important. Before you set the wheels in motion on an endowment, make sure you have a solid annual fund campaign, at least 3-5 years of fundraising under your belt, a growing donor base, and at least 3-6 months worth of money in the bank. In other words, make sure you’re working from a solid foundation.
  2. Try to incorporate an endowment into an annual campaign. After you’ve decided to set up an endowment, try to allocate a percentage of your annual fund dollars to a reserve account, which will eventually become the endowment. If you have an annual budget of $600,000, put 10 percent of that away each year in a reserve fund, and then in 10 years you will have a $600,000 endowment earning $30,000 each year in interest.
  3. The most successful way to raise endowment dollars is to convince your donors that the endowment will have a major impact on your constituents.
  4. The least successful way to raise endowment dollars is to convince your donors that the organization needs the money.
  5. Don’t let the endowment cannibalize your annual gifts from the same donors. You need to be very careful that endowment dollars are “over and above” the gifts that donors give to your annual campaign. This is critical.
  6. Most endowment dollars come from donors’ assets and investments. Encourage donors to put these assets into their estate plans, wills and bequests, and annuities.
  7. Individual donors are the best prospects for endowments. Since 85+ percent of all private donations in America come from individuals, make sure you target individual donors as the core of your planned giving operation. Occasionally, you can raise additional capital campaign dollars from private foundations (such as the Kresge Foundation) that go into endowments, but this is uncommon. And remember: most corporations are not interested in funding endowments.
  8. Look for consistent and long-term donors for endowment dollars rather than the major donors. A local hospital recently analyzed where their bequests came from. They were surprised to learn that it was their consistent, low-level donors that gave bequests, not the major donors. Other nonprofits across the country are beginning to analyze their bequests and finding the same trend.
  9. Organize an endowment committee of a few board members, some professional advisors (lawyers, CPAs, financial planners, investment specialists), and one or two donors. Allow this group to plan the endowment campaign and open the necessary doors for you. Make sure you let some of the faith-based leaders in your community know of your endowment campaign, advertise on your web site and newsletter, and make sure the endowment becomes a regular part of your fundraising efforts.
  10. If you have more than $25,000 in a reserve or an endowment account, develop an investment policy. Be very strategic about managing this investment resource.

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