Kevin Wilson
Harvey McKinnon
Note: This guest post is from Harvey McKinnon, with assistance from his colleague Kevin Wilson. Thank you both!
For many years I served on the board of a small arts organization. I loved the nonprofit, but one thing bothered me every time we went over the budget: our endowment.
The endowment totaled about $900,000, just shy of our $1 million annual budget.
It produced income of $45,000 per year; a 5% return.
The downside of endowments
Nice as that income was, our endowment – like most – was restricted. When we needed more money, we couldn’t touch the principal. Furthermore, if we had invested some of this money in fundraising, we would have gotten a much greater return. (More on this in a minute.)
Of course, the chief attraction of endowments is passive income. Money earns money – depending on how you invest it – and doesn’t require much effort.
Alas, this leads to another downside.
Endowments can insulate you from your community
A colleague of Andy’s used to run a mid-sized cultural organization in Philadelphia with a substantial endowment. Depending on how their investments were doing, he began each year with at least 30% of his operating budget covered by endowment income.
This is everyone’s fantasy, right?
Here’s the problem, he says: it made his organization lazy. They became less relevant to the community because they weren’t required to test their value and impact by asking their neighbors to give.
Ultimately, fundraising isn’t about money – it’s about community engagement. Fundraising is market research; when people give, you know they care. This benefit is harder to measure using a typical return-on-investment, dollar-to-dollar analysis, but it’s crucial, nonetheless.
Engaging donors creates social change
Donors “buy in” to your work. Fundraising provides an audience of advocates you can call upon to support you in challenging times.
If an ancient forest is being clear-cut, mobilize your supporters to take action. If the government reduces disability programs, your caring donors can be motivated to contact elected officials.
Your ongoing communications can inspire donors to do even more through volunteering: cleaning up a river, donating goods to the food bank, becoming a literacy tutor.
Fundraising vs. endowments: Which generates a bigger return on investment?
Here’s a typical story. We convinced a client to invest in fundraising to launch an annual giving program. They had $170,000 available. It could have been parked in an endowment, but their board took an educated financial risk.
Before their investment decision, they had 17 donors. Seven years later, it’s more than 15,000.
Typical investment and growth pattern when launching a new fundraising program
Instead of earning 5% or 10% on their endowment, they now net millions – even after factoring in all the ongoing mail, digital, and telemarketing expenses. Many donors have remembered them in their estate plans, guaranteeing large gifts long into the future. Monthly donors alone contribute more than $250,000 every year.
Building your donor file costs money, but you always will raise more money, over time, compared to passive investments.
It seems obvious – and yet…
In the nonprofit world, boards and executives consistently decide to invest in strategies – like endowments – that yield a lower return.
Why? For many, fundraising is mysterious, uncomfortable, or scary. Rather than take a rational look at the numbers – see the chart below – they respond emotionally. Which inevitably leads to poor financial decisions.
Note: By year 6, you still have many active donors who will give long into the future. This chart is just the beginning.
One more success story
Here’s another example. An urban farm in Vancouver, BC employs people with mental health and addiction challenges. Much of the food they grow is shared with partner organization who, in turn, feed their communities.
For years, the organization survived on grants and gifts from the founder’s personal network. They decided to take a risk and hire a part-time fundraiser for about $20,000 per year.
It took a few months for the money to flow. However, within a year, she had raised eight times her salary. She did this by creating fundraising systems, a donor stewardship plan, and an annual giving program using multiple strategies.
Do you want to grow? Invest in fundraising
If you have money in the bank or the stock market, take a portion and dedicate it to fundraising. If you’re persistent and patient, you’ll get a higher rate of return and do more for the people you serve.
Penny-pinching and scarcity mentality are widespread and insidious barriers to changing the world. Building your annual and monthly donor base, investing in major gifts, and promoting legacy gifts will always pay off.
Investing in fundraising is the secret to success.
This is perfect timing! I’m working with two very different organizations right now–one that has been ridiculously successful coming back from the precipice of closing to having over $1 million in the bank–and the board chair is OBSESSED with starting an endowment. The other client has been able to do very little fundraising over the years, but now faces a PR nightmare and though extremely popular, doesn’t have the base to reach out to for both $$ and community support. This brief article addresses both those issues so well. Andy, you continue to be a godsend!
ellen
Ellen, all praise to the authors: Harvey and Kevin. This is their work. I am happy to spotlight it.
Hi Ellen, I’m thrilled that the timing helps you.
These are wise words and supporting data. That said, this is not a zero sum game. An endowment messages to donors that an organization is stronger and longer lasting than the existing leadership – that the mission is highly valued and (on some level) sustainable for the long haul. That is a powerful message and a valuable fundraising tool. (If an organization begins the year with 30% of its operating funds in-hand, that is a benefit, pure and simple. If the organization has gotten “lazy” about connecting with its community, let’s not blame the endowment.) My experience is that there are often a handful of donors who highly value endowment and are willing and able to help create/build one. Don’t pass that by. But, the days of the year-long, all hands on deck, swing-for-the-fences endowment campaign, are not time well spent. (Sorry for the metaphor chaos there.) Thank you Andy, for circulating these accessible and thoughtful posts.
PS: I am not a consultant, just a perennial volunteer.
Lucy, these are all fair points. I appreciate your thoughtful response. Also worth noting that not every organization is meant to be perpetual. Some groups are created to solve a problem or meet a need, and then go out of business. In that case, endowments are inappropriate and might even send the wrong message. I can think of several examples, but I will leave it to other readers to jump in.
So true, Andy. I’ve been deep into the education and land conservation universes, which are mostly ‘perpetuity’ organizations.
Thanks for passing me another lens.
Lucy, Many good points.
And Andy’s response reminds me that I know of a number non-profits that have set up or have funds in restricted endowments. A potential problem because sometimes they address the issue (e.g. find a cure), or, with changing times, and changing priorities, they don’t want to fund these areas anymore.
Thanks for being a perennial volunteer – I’m one too.
I agree, Harvey. Restricted endowments can become a burden over time – and an inaccessible one, at that.
I am involved with land trusts, which make a promise to be around forever as guardians of the lands we protect, so I see the point in some endowment funding. But every word of this post, and the documentation about how investing in fundraising infrastructure pays better dividends is so useful and right on! Donations are always about more than money. Thank for this great post!
Yes, when you have the word “perpetuity” in your mission statement, a perpetual source of income makes a lot of sense. And, as you point out so clearly, that fact doesn’t negate all the wisdom in this post. Thanks, Cheryl!
Thanks Cheryl. I’ve worked with land trusts, and know that there will be donors who want to put money into an endowment. and making sure their money is there for the future to take care of land does make sense. That said, with a good relationship, you can often convince them to use their gift to invest in fundraising infrastructure which will maximize the land that is protected in the long term.