An Approach to Funding That Might Actually Work

As you may know, I’m a bit of a skeptic about the efficacy of traditional endowments. In an earlier blog post, “THIS is the Rainy Day,” I urged nonprofits with endowments to increase their spending rate in tough times and down markets, rather than following the common wisdom and lowering their annual draw (and fiscally starving themselves in the process). My point was: There are needs now. Let’s fix them. Let’s spend a bit more from the endowments today to prevent chronic problems from continuing tomorrow. And then we can then go out and raise new funds to build up our capital.

Some of you thought I was radical and misguided to suggest that. Others cheered. But let me tell you: my suggestions are very modest compared to those put forth by Michael Wilkerson, a professor at American University, in a recent post in the Stanford Social Innovations Review called “Ephemeral Perpetuity? Transforming Permanent Endowments into Annuities.”

Take a look. It’s brief but powerful. Wilkerson raises what, in retrospect, is a stunningly obvious question: Why were the best-endowed institutions the ones whose operations suffered the most in the wake of the market crash of 2008? Or put another way: Are endowments really good for you?

Wilkerson further wonders whether the notion of institutional perpetuity (which undergirds the whole concept of endowment-building) is appropriate for any but museums and major universities. Are we right to presume that relatively small nonprofits will still be – or even should still be – here in forty or eighty years? Businesses regularly fold up shop when times change. Why do we think that nonprofits are immortal? And can’t the smaller nonprofits really benefit much more by funds that spend down principal and interest over a set period of years, rather than from endowments that provide five percent or less each year forever? (This notion is in alignment with one of my friend Anne’s suggestions in my recent post, “All Bequests are Generous; Some Can Also be Smart.” )

Let’s apply Wilkerson’s thinking to a typical small nonprofit – say, one with a budget of $1 million, an endowment of $1 million, and – of course! – challenges to their current income stream. Their staff is under stress and underpaid, and turnover is high. The board takes a traditional route and decides that they should double the endowment, and the organization undertakes an ambitious effort to raise the million dollars. When all is said and done, this will produce $40,000 to $50,000 a year in new funding. Not bad, but hardly transformational, and probably not worth the effort, particularly as they no doubt will have taken a hit in their annual fundraising during the campaign.

I propose that instead the organization raise $1 million in “Aspirational Impact Funds.” The funds, both principal and interest, would be spent down over the course of 10 years. The money would be invested conservatively, given the time horizon. (We would want to ensure no erosion of principal.)

The result would mean $100,000 (and more, with earnings) each year, or a 10+% increase in organizational income. A share of that — I would suggest 60% — should go toward core operations. Salaries could rise, staff retention increased, services and reputation improved, and more clients served in a better way. The balance could be directed toward testing new ideas, R+D, risk-taking ventures. Donors could see the results of their gifts – and they would consequently increase their annual support, further strengthening the organization. Board members (and staff, of course) would be engaged and energized by the R+D work. Within a few years, the organization could launch another campaign – more ambitious this time, and built upon their momentum and findings – for new Aspirational Impact Funds to drive the organization for another decade or more.

This is heresy, of course, because we’ve all been trained to think that charitable gifts take one of two forms: either directed toward annual/operating expenses or toward traditional perpetual endowments. But that’s a model created by and for large prestigious institutions. And, as those of you who are loyal readers of this blog know, I feel strongly that there’s little connection between the needs of an Ivy League university and those of a local youth organization or community theater. Let’s junk the old model and figure out strategies that would actually make a difference. What do you think of this one?

Copyright Alan Cantor 2012. All rights reserved.

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6 thoughts on “An Approach to Funding That Might Actually Work”

    1. I haven’t seen examples of this, Margaret. (Other readers — tell me if you have seen this!) But I think it’s only because it hasn’t been tried. I feel certain that this could be very attractive to donors, and fairly easy to track. There’s a pretty simple rule in nonprofit development and accounting: you have to use the funds according to how the donors understand their funds are being used. If you raise the funds for a traditional endowment, you have to manage them according to rules (usually set state-by-state) governing endowments. But if you raise them for Aspirational Impact Funds as I describe them here, and you say to the donor how the funds would be used over the course of 10 years. Then you can use those funds exactly that way. And in the process you’ll create models for others to emulate.

      This post has triggered a lot of emails to me from folks saying it’s JUST what their organizations need. Great! I also heard from one person who works for a conservation land trust. She said that traditional endowments are perfect for them, because they monitor the conservation easements of land parcels in perpetuity. That makes sense: perpetual funds for perpetual needs! I say let the fund fit the need, and we should raise money for the kind of fund that fits.

  1. You are approaching this much as a venture capitaliist approaches a start up. That is, until the company starts generating revenue from operations, the staff is getting paid by the VC. They would never think of holding back because that obviates their bet in the first place. And in bad times the wise VC will actually double down. This is a great idea and puts the mission of the non profit ahead of the egos of the board.

    1. You’ve hit on one of the great disconnects in the nonprofit world, Jack.

      In business, as you point out, founders invest (including borrowed and begged funds) to get the operation off the ground and profitable — and they and the VCs and other early investors then reap the returns (at least, when the business indeed gets profitable and attractive to new ownership). In the nonprofit world, whether it’s a foundation (preserving its principal and only putting out 5% a year in grants) or a nonprofit with a traditional endowment (a similar parttern, as illustrated in this example), most of the funds are essentially being hoarded for use at some future date.

      Given that in most cases the need isn’t being fully met now, then really what we’re doing is ensuring that the need can be met in the same inadequate way in perpetuity. (Isn’t that inspiring? Imagine putting together a fundraising campaign with that tagline?) At a time when we’re dealing with major societal and economic and environmental and medical issues, with serious consequences if we don’t fix things now, the priorities seem skewed. This is not to imply anything but the best intentions the part of those carrying out the old policies. They’re following conventional wisdom, and this is how things have been done. History and habit are hard to change. But… one size does not fit all, and I would argue that in most cases the fit is really bad.

  2. A very compelling discussion for maximizing the benefits of an endowment while strengthening ongoing services and programs. I’m thinking of the small non-profits running on the special events treadmill in order to sustain their mission. This concept would enable them to make strategic changes in their developement plans and look to the future with greater vision. Also, what better way to connect with donors over time than show how their philanthropy is making a difference over time….

  3. Really interesting take on the permanent fund issue, Alan. I’ve always liked the idea of having a “wild schemes” fund to try out new ideas and methodologies. Jean Hennessey established one at the NHCF when she was director and it always appealed to me. It predated “venture capital” and “entrepreneurial” in the lexicon. At one point we implemented a fund with our leadership with this goal in mind, but it got bogged down there and I never had the vision to make it an agency-wide campaign.

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