How to Start an Endowment For a Nonprofit

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August 26, 2022

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As a leader in your nonprofit organization, you are responsible for supporting your nonprofit in long-term future planning.

This can include overseeing a strategic planning process, setting policies to support staff retention, and even starting a nonprofit endowment.

An endowment can send a signal to your community that your nonprofit is stable and is planning to be around for a very long time. It can also help your community and potential donors feel confident in making financial contributions to your organization.

So, what is an endowment? And how do you start one for your organization? Keep reading and we will tell you!

What is an Endowment For a Nonprofit Organization

Assets

Let’s start with the basics: what is an endowment?

Endowments can be generally described as assets—usually cash accounts that are invested in equities, bonds, or other investment vehicles—that are set aside so that the corpus, or original asset, is able to grow over time as a result of earned interest.

What a mouthful! To make it as simple as possible, endowments are assets that nonprofits set aside that are able to generate interest and earn income for the nonprofit year after year.

Ok, so we understand what an endowment is. But it’s also important to understand what it isn’t.

Endowments are not the same thing as ‘reserve funds’. With an endowment, some (or all) of the assets are restricted. Typically, you are required to keep the principal investment intact in order to allow it to grow.

However, nonprofits can use the annual investment income generated by the endowment to support programs and general operations.

Why Should a Nonprofit Organization Start an Endowment?

Person wondering

There are quite a few benefits to starting an endowment for your nonprofit organization.

As you probably know, fundraising is hard work. Gifts of cash from donors and occasional corporate and foundation grants don’t always support the long-term planning that your organization needs to be sustainable for years into the future.

An endowment can not only help shape the future of your organization, but it can help you broaden the scope of your programs and increase your impact on your community.

How does an endowment do this?

An endowment diversifies your nonprofit’s revenue streams. Rather than relying on cash donations and corporate or foundation grants, an endowment provides investment income year after year.

An endowment can also help you attract new donors. Nonprofits with endowments are impressive! Donors, especially those who are in the process of estate planning, will find an endowment an appealing way to support your organization.

An endowment is appealing because it’s a long-term investment, and it demonstrates to donors that your organization is financially sound and is looking to the future—and they can be a part of helping to build that future!

The final reason why you might want to consider an endowment is that it can help your organization be prepared to handle an unexpected economic downturn.

If the COVID-19 pandemic has taught us anything, it’s that we should always be prepared for the unexpected. An endowment can help with this! The investment income generated by the endowment can be used to help cover operating expenses if the economy suddenly turns south.

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How to Start an Endowment: 5 Steps

Start

Now you know what an endowment is, and maybe you’re interested in exploring how to build one for your nonprofit organization. That’s great!

We’re going to outline 5 steps that you can follow to start building an endowment at your nonprofit. Keep reading!

1. Build the infrastructure for the endowment

Not every nonprofit is ready to start an endowment. For example, if your nonprofit struggles to keep the lights on daily, it isn’t the best time to think about long-term endowment gifts.

Your nonprofit needs to be in a position where you can clearly manage the endowment.

How do you know if you’re ready to think about an endowment? Here are a few indicators that your organization is prepared to pursue creating an endowment:

  • Your nonprofit has been in existence for at least 8-10 years
  • Your organization has grown its programs over the time it’s been in existence
  • You have a solid, successful fundraising program that includes an annual fund, individual and major donors, and foundation and corporate funders
  • Your organization’s staff is stable and shows growth commensurate with your program growth
  • You have a chief financial officer or other staff members that will manage oversight of the endowment
  • Your Board of Directors is in support of building an endowment

If your organization meets all—or even most—of these criteria, you’re in a good place to start building an endowment.

2. Make the case for an endowment

Once your organization has the appropriate infrastructure in place, the next step to starting an endowment is making the case to your Board of Directors and your staff. It’s important for them to understand an endowment's impact on your organization’s ability to achieve its mission.

Without buy-in from these internal stakeholders, you will find it difficult to move forward with starting an endowment.

3. Build the endowment team

A successful endowment campaign is a team effort. While your nonprofit's

fundraising and financial staff will play key roles, they cannot build and manage

an endowment alone.

It’s important to be clear about roles for staff and board members and even consider a professional financial advisor.

Board of Directors Roles:

Board members have some key roles as your nonprofit works to start an endowment. In fact, some of their basic key responsibilities, such as participating in your organization’s strategic planning process, will contribute to the success of an endowment in the long term.

Board members should also participate in the endowment's design, ensure the organization's internal infrastructure is set up to manage the endowment, and review regular reports on the endowment’s growth.

The board also plays a role in the policy process as the endowment is being created. They can support your nonprofit in crafting an investment management policy, which should be in place before an endowment is created.

Staff Roles:

The nonprofit's chief executive, chief finance personnel, and even development personnel all need to be prepared to support the launch of the endowment.

The organization's chief executive will likely take the lead in making the case to the Board of Directors that an endowment is appropriate for the organization.

They’re responsible for reporting on the endowment to the board, working with the board to create an investment management policy, supporting the chief financial staff in managing and administering the endowment, and providing oversight on how and when the investment income is utilized.

The chief financial staff member, whether that is a CFO or Controller or another individual, will be the person charged with oversight of the endowment once it is established.

They need to understand the role of the endowment and the long-term strategy behind its creation. They will work with the chief executive to generate reports on the endowment’s performance to provide to the board, support the development team in efforts to generate gifts to the endowment, and help oversee how the investment income is spent.

The chief development staff person will support the endowment by conducting fundraising duties related to generating gifts to the endowment. This may be through planned giving, major gifts, or some other fundraising campaign. This individual will also market the endowment and appropriately steward any gifts made to it.

4. Market the endowment

Once the endowment is created, your organization needs to market it effectively.

Don’t be afraid to market the endowment! Nonprofits often fail to market their endowments out of fear that it sends the message to donors that the organization is financially well-off and is no longer in need of contributions. This isn’t true!

If your endowment is marketed correctly, it becomes an incredible vehicle to drive planned and major gifts.

The most critical piece of marketing your endowment is drafting a case for support. Many donors will be thrilled to make a gift to an organization that is actively planning for long-term stability.

Letting your donors know that their gift will support the organization in perpetuity is a great way to make a case for endowment support.

And, if your organization does not have a planned giving program, this is a great time to start one. Donors can create gifts to the endowment within the context of their estate planning.

5. Make a plan & set goals for the endowment

There is one major mistake that nonprofits and boards make when setting goals for their endowment: they assume that an endowment will address short-term fundraising goals. This is not correct! It takes time to grow the endowment so that it begins generating investment revenue. It’s a marathon, not a race!

There are a few things to remember when setting goals for your endowment.

Make sure you have a strategic plan in place for your organization and align the goals for your endowment to your organization’s strategic plan. Both your endowment and your strategic plan are valuable tools to ensure your organization remains strong in the long term; they should complement one another.

You should also make sure your goals are reasonable. For example, if your organization currently raises only $1 million annually via fundraising, setting a $10 million endowment campaign goal is unrealistic! Instead, set smaller, more realistic goals for your endowment.

Setting incremental goals can also be a helpful approach. For example, consider setting goals for years one, two, and five of the endowment. Here’s what that could look like.

Year 1 Goals

  • Develop donor prospects
  • Create and adopt gift acceptance and endowment management policies
  • Create an endowment marketing plan
  • Launch a planned giving program
  • Obtain endowment gifts from at least 50% of current board members

Year 2 Goals

  • Increase board endowment participation to 100%
  • Send letters to 200 potential endowment donors
  • Hire a part-time staff member to support endowment fundraising

Year 5 Goals

  • Launch an ongoing endowment committee or task force
  • Have at least 150 donors to the endowment annually
  • Manage an ongoing, successful planned giving campaign
  • Secure 5 estate gifts per year

What to Know Before Starting an Endowment For Your Nonprofit

Understand

It’s important to remember that starting an endowment is not the right choice for every nonprofit.

Before starting an endowment, you should make a realistic assessment of your organization and its mission. Examine your strategic plan to ensure it is up-to-date and accurately captures your organization's long-term goals.

Also, take a look at your fundraising program to ensure that you have a strong donor base and the staff capacity to manage the marketing of the endowment and the stewardship of gifts.

If your organization lacks long-term planning documents, board support, staff stability, and a successful fundraising program, it might not be the right time to start thinking about an endowment.

Wrapping Up: How to Start an Endowment For a Nonprofit

Asset

Before you start an endowment for your nonprofit, you need to understand what an endowment is, garner support from your Board of Directors and key staff, and assess that your organization is ready to make this long-term investment.

If you and your key stakeholders determine you are ready to create an endowment, we’ve listed five steps that will lead you to success: make the case for the endowment, build the infrastructure for the endowment, build an endowment management team, market the endowment, and set (realistic!) goals for the endowment.

If you follow these steps, you can start an endowment and create an avenue for long-term investment revenue generation for your organization, which is an incredible feat!

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