Do you need an endowment?
Short answer: yes. Absolutely.
Just like your household should maintain a savings account – or more accurately an investment account – for emergency needs and retirement, nonprofits need reserve funds or endowment for emergencies and long-term financial stability.
The long answer is less simple. Yes, you should have one, but growing and developing an endowment requires two things:
1. Enough financial stability that you can save for tomorrow instead of just spending for today
2. A mature fund development program that includes dedicated and passionate supporters and a strong major gifts component
First, some definitions.
A reserve account can serve as perhaps the first step toward an endowment. Think of this as your savings account. Most nonprofits should have the capacity to build their reserves. Bring in more revenue than you spend in a year, and you can sock some away for a rainy day. Like you should pay your personal savings account first each month, try to do that with your reserve account. Although pay attention to donor intent; you can save unrestricted funds, but often restrictions prevent you from using those for your reserve account as the donor wants them spent immediately and for a specific purpose.
An endowment, on the other hand, is your long-term investment account. Think of it as your 401K or other retirement account. Once you put money into that account, you cannot touch it until you retire without substantial tax implications. For an endowment, you generally do not invade the corpus – the money that you invest in the account – and get a distribution from the interest and dividends that accumulate. In this way, your endowment provides an annual income stream for the organization that should last forever.
Sounds great, right? Who would not want that?
But wanting an endowment and building one are two very different animals.
To create an endowment, you need three things:
1. “Extra” money. If you struggle to raise enough money to keep your operations going, where will you find the money to invest in an endowment? While you can make a conscious decision to also add to an endowed fund – just like you put money toward your 401k account early in your career when you needed those dollars for food and housing, you still need to pay your bills.
And you need willing donors. Which brings me to:
2. Passionate donors. When you ask someone for a gift to your endowment, you ask them to bet on your organization in the long-term: that it will exist forever, that it will continue to meet its mission, and that it has a mission worth meeting. Only the most passionate donors will want to do that, so you first need a cadre of dedicated, passionate, and engaged donors who want to support your mission long after they expire.
Where do you get those donors?
3. Strong major donor program. Often those passionate donors come from your major donor program: those large dollar donors with whom you have spent years – sometimes decades – developing a strong, trusting relationship. They love your organization, and you have shown through your actions that they can trust you to use their money appropriately. Rarely, if ever, will someone invest in your endowment who has not developed this type of relationship with your organization; if they do, they invest small dollars, more akin to an annual fund gift.
If your organization does not have an endowment and wants one, I would honestly assess your situation as it relates to these three criteria and strategically build the organization over the next few years to get it to the place where you can afford to put some money away and have donors ready, willing, and able to invest in your long-term financial health. Start by building a reserve fund; if that grows large enough, it can seed an endowment down the road, and you can feel confident that you can put some money away without hurting your operations. Meanwhile, build your major donor program. It will give you extra funds for your reserve and start to cultivate your most passionate supporters.
Good luck!