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