Why Nonprofits Need Endowment Funds

By Rachel Cyrulnik

Endowments are widely perceived as the most advanced, unapproachable and intimidating type of fundraising. This reputation creates significant barriers for many organizations and their development teams. Nonprofits often operate with limited bandwidth and confront many competing priorities.

Additionally, many perceive endowments as a back-burner luxury rather than a key strategic priority due to this lack of bandwidth and persistent myths about endowments. For organizations that engaged in endowment conversations before the pandemic, many pulled back to focus on the crisis and are now revisiting endowment initiatives.

Endowments — a Key Strategic Imperative for Nonprofits

In truth, endowments are not a back-burner luxury. Financial sustainability, program innovation and preparedness for unpredictable situations are among the chief reasons that organizations embark on endowment efforts. Endowments are the mechanism to secure these goals in perpetuity.

For many organizations, despite limited capacity and a long to-do list, launching an endowment campaign is worthwhile, as endowments yield the highest return on your investment of time and effort in the long run — I’ll explain with a simple example later.

Debunking the Myths About Endowment Fundraising

In addition to being seen as a luxury, endowments are often passed over because they are intimidating! Many myths abound about endowments, causing nonprofits to hold back. Before exploring what endowments are, let's dispel the most common myths about what they are not.

1. Endowments Are Too Complex for Most Nonprofits

Endowment fundraising involves partnerships with in-house professionals or advisers, such as the donor's advisers or outside counsel, but the reality is that soliciting endowment gifts does not require a sophisticated understanding of finance and planned giving. A broad understanding of planned giving options is sufficient, combined with good cultivation and stewardship skills.

What truly makes endowment fundraising successful is consistent face-to-face visits with current and prospective donors over time. It requires disciplined effort and moves management, not financial expertise.

2. Endowment Fundraising Takes Too Long to Pay Off

Part of this myth contains a truth — endowment fundraising does not produce quick results. It's a steady effort that wins the race. Endowment gifts typically take 12 to 24 months from cultivation to gift agreement. When deferred giving is used, the organization may not receive the revenue for many more years. However, the return on investment in planned giving is usually the highest of all fundraising techniques when measured over time. The real myth here is that your organization can't afford to wait for the results. Your organization shouldn’t wait — the results are absolutely worth it.

3. Without a Planned Giving Officer, We Can’t Raise Planned Gifts

Wrong! If you've raised major gifts, you can raise planned gifts. Learning planned giving is like cross-training — it's good for your brain, like coordination or lateral moves in a workout.

Donors don't think of themselves as one donor type. They don't categorize themselves as only a "planned giving prospect" or "major gift donor." They think about their philanthropy as a whole and their complete relationship with the organization.

Rather than treating endowment and major gifts as separate functions, an integrated or blended gift strategy focuses on the donor's perspective and their full giving potential across their lifetime and beyond. Endowment gifts can be funded by both current major gifts and future planned gifts, and an integrated approach helps fundraisers identify and maximize these opportunities.

4. ‘Endowment’ and ‘Planned Giving’ Mean the Same Thing

Endowments and planned gifts are separate concepts that work hand-in-hand. An endowment is what you do with the gift — invest it in a permanent vehicle for the organization — rather than the gift itself. You can begin growing your endowment with deferred gifts, but you can also use current major gifts to build an endowment. Planned gifts are contributions arranged in the present and allocated on a future date. Commonly donated through a will or trust, planned gifts are usually granted when a donor passes away.

Understanding Endowments: The Fundamentals

To make endowments feel less abstract, it helps to understand what they are, the types of gifts that support them and how they differ from other fundraising types.

Types of Endowment Gifts

Endowment campaigns can receive various types of contributions — both planned and cash gifts. Planned gifts typically come through wills and estates or life-insurance policies. Cash gifts for endowment campaigns typically don’t come from donors’ checking accounts, as annual gifts tend to do, but from savings — a different bucket that might include proceeds from selling a business, qualified charitable distributions from individual retirement arrangement charitable rollovers or appreciated securities.

Why Endowments Are Different — and Why They Matter

Endowment campaigns differ fundamentally from all other fundraising efforts. Endowment fundraising is focused on the future, much like a retirement fund. (Most people would not consider saving for retirement a luxury, so why do we think of it as such for a nonprofit?)

Whereas an annual fund gets depleted each year, an endowment is permanent, and the organization benefits from the interest it produces each year. An endowment doesn't go away. In fact, it grows over time.

Imagine you give $100,000 to an organization. You have two choices — spend it now or put it in an endowment. If you give it this year, it’s spent this year. Next year, the money is gone and the nonprofit needs to fundraise again.

If you put it in an endowment that grows 7% annually — 5% spend rate and 2% net annual growth — your one-time gift of $100,000 creates hundreds of thousands of dollars in impact over time so that, in 50 years, the endowment principal grows to $269,000 and the total program support distributed is $423,000. That is the multiplier effect — your money works over and over again instead of just once.

We are currently witnessing the greatest transfer of wealth in history — tens of trillions of dollars are changing hands. Assuming that 5% of this wealth goes to charity, there's an unprecedented opportunity to capitalize on the baby boomer generation's philanthropic potential.

Endowment campaigns are not a luxury, but a strategic imperative for organizations committed to long-term sustainability and impact. By understanding what endowments truly are, debunking the myths that create barriers and embracing an integrated approach to fundraising, organizations can transform the dream of robust endowments into reality. The key lies in consistent cultivation, strategic partnerships and the patience to pursue gifts that will secure your institution's mission in perpetuity.

The preceding content was provided by a contributor unaffiliated with NonProfit PRO. The views expressed within may not directly reflect the thoughts or opinions of the staff of NonProfit PRO.