An endowment is a donation of money or property to a nonprofit organization, which uses the resulting investment income for a specific charitable purpose and generally never invades the principal. Such endowments typically spend between 4% and 6% of principal on their restricted purpose. One of the most famous endowments, the Lucasian Chair of Mathematics at the University of Cambridge, has been held by luminaries like Isaac Newton and Stephen Hawking. Henry Lucas's bequest creating the professorship has undoubtedly had a fantastic impact over the duration of its history. Endowments make so much sense over the long term for purposes that have a perpetual ongoing need. The power of compounding interest, over hundreds of years, can turn a relatively modest donation into a very large amount of money with an equally large impact. But few of us, and even fewer of our donors, want to wait hundreds of years to see significant impact from our giving. Our world has pressing needs now and it’s critical that donor dollars are put to work addressing such needs. The urgency of the moment, and the relatively small impact of most endowments can make it challenging for many nonprofits to solicit such gifts.
To make this very clear, a donor who gives you a gift of $100,000 is only going to see around $4,600 worth of impact each year from their gift. Sure, in 100 years, they might be happy with the results, however most donors capable of giving you $100,000 would prefer to see $100,000 worth of impact made with their gift.
Many organizations wish they had an endowment, especially one started 100+ years ago, yet because of the lack of impact, they often struggle to find donors for such a cause. Here’s my best recommendation on how to grow an endowment, while giving your donors the impact they are looking for.
Ask for both.
Ask your donors to give current dollars to be spent now to make the impact they want to see, but also ask donors to consider adding your organization to their estate plans with their gift directed to an endowment. This way, the donors will continue to be well stewarded for the big impact their gifts are making, while ensuring that their annual gifts toward the cause they love will continue in perpetuity.Â
Here’s how this works. I have found this approach to work especially well with scholarship programs. Typically, we might ask a donor for a five-year $50,000 pledge to endow a scholarship. Many times, donor giving to that endowment would trail off once the scholarship was fully endowed or continue at a lower amount. That $50,000 gift would only result in an annual $2,125scholarship against a $40,000 a year tuition bill. Student impact was minor, not resulting in the grateful students we would want. Instead, I began asking alumni for the same $50,000 pledge to fund a single annual scholarship of $10,000, that’s 25% off the student’s tuition for the year. You can believe that this made a tangible difference in the life of the student resulting in serious gratitude moving forward. At the same time, I asked the donor to add a provision in their will to fully endow the $10,000 scholarship by donating a percentage of their estate. That’s a $250k estate commitment! Â
Not only does this get you $300,000 hitting your fundraising results that year, but if you steward the gift well, the likelihood is that your donor is going to continue giving that $10k annual gift moving forward. At the same time generations of future students are going to benefit from the endowment you’ve created through their estate gift. You will also find that the recipients of larger scholarships will be much more likely to make their own gifts after they have graduated, having personally experienced the difference that philanthropy can make!
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