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Financing Not Fundraising: Kiss That Endowment Dream Goodbye

By Nell Edgington



There was a great post in the Nonprofit Finance Fund’s Money and Mission blog last month debunking the myths around nonprofit endowments. An endowment is a corpus of money set aside by a nonprofit to generate long-term income for the organization’s operations. I can’t tell you how many times I hear nonprofits say that their money woes would be solved if they could just raise an endowment. Some even forgo easier, more reasonable forms of revenue generating activities in order to pursue pie in the sky endowment campaigns. That is crazy.

Today in this month’s post in the on-going Financing Not Fundraising blog series, I’m explaining why most nonprofits should kiss their endowment dreams goodbye and focus instead on finding a more realistic path to financial sustainability.

In case you are new to the series, it discusses how nonprofits must break out of the FUNDRAISING (individual donor appeals, events, foundation grants) box and instead create a broader, more strategic approach to securing the overall FINANCING necessary to create social change. You can read the entire series here.

I’m not suggesting that endowment campaigns are wrong for all nonprofits. But here’s why they don’t make sense for most:

  • Endowment money is extremely difficult to raise. The majority of donors want their dollars to go directly to the day-to-day work of a nonprofit. It is hard enough to convince a donor to fund growth or capacity capital campaigns that strengthen the organization. But to convince a donor to give a nonprofit money to put in the bank so that the organization can be relieved of some of the burden of otherwise finding a sustainable revenue engine is a really hard sell.

  • Endowments are an inefficient use of money. Let’s say a nonprofit was able to raise an endowment of $1 million and then enjoy an annual 5% return. This would give them $50,000 of operating revenue each year. Sounds great, right? Wrong. If instead the nonprofit could use ALL of that $1 million as capacity capital to build their infrastructure, staffing, technology, or systems, those transformations to the organizational structure could yield many times more than $50,000 per year in financial sustainability and/or social impact.

  • Endowment campaigns require a major donor base. Most nonprofits have not yet figured out how to attract and retain major individual donors. Thinking that you can leap frog the donor cultivation process by going from a few small individual donors to large, endowment donors is crazy. It takes years of on-going cultivation of high capacity donors to secure endowment gifts. Nonprofits would be far better served by using their time and resources to create a solid annual individual donor campaign based on pull marketing efforts for smaller donors and one-on-one cultivation of larger major donors.

  • There is no magic bullet for financial sustainability. When I hear nonprofits talking longingly of endowments it is with an unspoken assumption that once secured an endowment would solve all of their money problems. But the truth is that there is no magic bullet for sustainable nonprofit funding. The only way to create a sustainable funding engine for your nonprofit is to create a financial model that fully integrates with your mission and core competencies. I’ve found that the nonprofit leaders who are most interested in the endowment magic bullet theory are those who are most uncomfortable with money. Instead of fearing money, you must embrace it and learn how wield it to your advantage.

Instead of wasting time, effort, and resources on endowment campaign planning, move your nonprofit to true long-term sustainability by creating a financing plan for your organization. Stop trying to “solve” your money problems and instead embrace money as an incredibly useful tool for creating lasting social change.

If you want to learn more about applying the concepts of Financing Not Fundraising to your nonprofit, check out our Financing Not Fundraising Webinar Series, or download the 27-page Financing Not Fundraising e-book.

Photo Credit: Library of Congress Archive

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About the Author: Nell Edgington is President of Social Velocity (www.socialvelocity.net), a management consulting firm leading nonprofits to greater social impact and financial sustainability. Social Velocity helps nonprofits grow their programs, bring more money in the door, and use resources more effectively. For more information, check out Social Velocity consulting services and clients.


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4 Comments to Financing Not Fundraising: Kiss That Endowment Dream Goodbye

Clay Myers-Bowman
June 8, 2012

Nell, this is a very interesting post and causing me to do quite a bit of thinking. I find myself mostly agreeing with your assertions, but also have experiences that don’t quite match. You should schedule an online discussion of these ideas. It’d be a lot of fun.

Nell Edgington
June 11, 2012

Clay, I’m glad to hear the post got you thinking, that was my hope! I’d love to hear about your experiences that don’t match. Please feel free to add them here in the comments. But I’ll also look into an online discussion on the topic, that’s a great idea! Thanks!

I agree it’s an interesting post. And, indeed, it’s magical thinking to hope an endowment will solve all of an organization’s problems. Even if it were possible to build an endowment large enough to fund your entire annual operating budget, it would proved deadening for the organization. It would be a bit like the trust fund baby who never gets a job and never creates anything of his/her own. There’s something essential and vital to the life of an organization when it’s required to justify its existence to the public on a continual basis. It’s how we know we’re meeting needs. If we aren’t, no one will support us.

Our world has limited resources, and we want them being spent on the organizations that do essential work. Things change over time (which is why many foundations decide at some point to spend down their resources and go out of business).

At the same time, I wouldn’t want to ignore the opportunity to build a nest egg. In fact, I’d go so far as to say that a mature, responsible nonprofit (much like a mature adult) should have BOTH a checking account (operating budget) and a savings account (endowment). One never knows when crisis may strike… or opportunity arise. It’s important to be able to respond when unanticipated events occur.

So… I think both are important.

Nell Edgington
June 12, 2012

Claire,

I love your trust fund baby analogy and think your point about a nonprofit needing to justify its existence to the public on a continual basis is an excellent one.

I agree that endowments do make sense for some nonprofits, especially those that are much further down the road in terms of maturity, donor base, etc. I just think that for the vast majority of nonprofit organizations they just don’t make sense.

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