There comes a time in an endowment campaign when the initial urgency of the need inherent in the campaign's case for support begins to fade. The excitement of the kickoff, anticipation of success as the personal solicitations begin, the first promising results --- can go for naught if the campaign goes on too long. As an organization's endowment campaign begins to extend well into its second year of actual solicitation activity, volunteers begin to grow tired and donors will not believe there is a real and immediate need for their money. Invariably, campaigns of this type slow, stall, and sometimes fail because the management and implementation of the campaign plan were not well organized. The key to successfully completing an endowment campaign on or before its established and public deadline is, in a word, organization.

Because an endowment campaign is a special, widely-spaced occurrence, a non-profit organization must be certain its leadership fully understands the process of raising endowment funds, knows how such a campaign effort fits into their overall development plan and ensures the organization and resources are in place to carry it out.

An endowment campaign is a fund-raising campaign that raises money for an organization to invest rather than spend. The proceeds from an endowment campaign are placed in an endowment fund, the income from which is used by the organization to meet ongoing expenses, cover capital expenditures, or fund special projects and programs.

An organization which undertakes an endowment campaign does so in order to lessen its need either to raise money each year to cover any operational deficit --- the difference between earned income and expenses --- or to raise money for occasional extraordinary expenses. Income earned on money placed in an endowment fund is restricted to the purpose of that fund, and the fund is not easily invaded. Usually, an organization's bylaws make it hard, if not impossible, for the organization to spend endowment.

Because of the special nature of endowment funds, an organization should undertake an endowment campaign only when:

1. The organization is old enough to have exhibited sufficient financial stabilityfor donors to feel comfortable giving to endowment which will yield income in perpetuity. Endowment is for eternity, and before beginning an endowment campaign, an organization needs to be well-enough established to anticipate a long life; an organization with a history is more likely to look like an organization with a future.
   
   
2. The organization anticipates and expects that in the short term it can cover any operational deficit through an annual campaign and other gifts and grants. It simply is not good business to expend limited resources on an endowment campaign when those resources may be desperately needed to raise money to offset an operational deficit. Another argument for having a strong annual campaign in place before attempting to raise money for endowment is that a successful annual campaign program aids endowment fund-raising efforts by creating a cadre of volunteers and a proven donor base.
   
   
3. The organization has the desire, resources, and opportunity to manage a successful endowment campaign for a substantial amount of money. Since the money being raised in an endowment campaign is to be invested for future income, the goal should never be small. The effort required for an endowment campaign is too great to justify a result that when invested will yield only a few thousand dollars of yearly income.
   
   

Endowment campaigns ought to be rare creatures. They probably should have a separation of at least five or seven years between them. Special anniversary years of an organization's founding --- the 10th, 25th, 50th, --- are often used to whip up interest, but an endowment campaign is not something that should be scheduled as regularly as every five years. You have to be careful about arbitrarily deciding that it's time to go out and make another pass at raising endowment. Like capital campaigns, endowment campaigns rely heavily upon large gifts from a few donors. Run them too close together, and you may find that your donor base is still meeting its last pledge. That does not bode well for the success of new requests.

While an annual campaign is a broad-based effort relying on smaller gifts from a great number of donors to achieve its goal, an endowment campaign expects a much smaller number of donors to make very large gifts. In an endowment campaign you should expect to get a third or more of the goal from 10 or 15 donors. The second third or more would then come from an additional 75 to 100 donors, and the remainder in smaller gifts from whatever other donor base you have targeted for the campaign. In short, an endowment campaign must be a large-giver campaign.

All too often, organizations that have decided on an endowment campaign begin with the idea of making it a broad-based appeal. You can't raise a million dollars by targeting as your primary donors those who have the capability to give $100 or even $1,000. You would have to achieve 10,000 of the former or 1,000 of the latter. Rather, you need to begin by targeting prospects who can give at least $50,000 --- and remember, a number of those prospects may give only $5,000, or $10,000, or $20,000, instead of the $50,000 you suggested. Especially daunting is fund-raising's "rule-of-thumb" prospect to donor ratio. You usually need to identify at least three viable prospects for each contribution you desire at the required contribution level.

At the Cleveland Orchestra, I once disagreed with the volunteer leadership of a $15 million endowment campaign about the size of gifts we should be seeking. The idea was put forth that we raise $5 million by enticing people to endow each of the 2,000 seats in our concert hall. That worked out to $2,500 per donor. I strenuously objected to this, literally risking my job. My reasoning was simple: We would not succeed in finding 2,000 donors at $2,500 each. Experience had shown me that the base of donors able and willing to give that much wasn't large enough. I also feared that the campaign committee and solicitors would get used to the idea of asking small, and the campaign would lose its steam.

My argument held, and the volunteer leadership agreed not to put so much of the campaign effort into an idea that past experience showed could not succeed without damaging other areas of the drive. In our effort to find 2,000 donors willing and able to make gifts of $2,500 we would have included donors we knew to be capable of making far larger gifts. These would be donors we would need to solicit for other, larger-gift divisions of the campaign. It is never a good idea to ask for two separate gifts for the same campaign. Donors will often make the decision to give either one or the other, and the option they pick can well be the lower.

Because of the amount of money being raised and the size of the gifts being sought, volunteer leadership and solicitors in an endowment campaign will be drawn more heavily from the upper echelons of the community's business and civic leaders. This fact, combined with the infrequency of endowment campaigns, gives them a far higher visibility than annual campaigns. An annual campaign which comes up a little short can often be glossed over and made up the following year. An endowment campaign which fails to make its goal --- especially if that shortfall is substantial --invites questions about an organization's vitality, management, and potential for longevity. It also reflects badly on the campaign's highly visible volunteer leadership. People do not volunteer to lead fund-raising campaigns in order to fail publicly. An organization that begins an endowment campaign with a goal that does not match the capability of prospects to give, dooms that campaign to failure, and organizations that experience a highly visible failure find it harder to recruit campaign leaders and solicitors for future efforts.

Endowment campaigns are of longer duration than annual campaigns. It takes more time to make the contacts and cultivate them, and it usually takes longer for donors to decide to give larger sums of money. My experience has been that, from kickoff to finish --- no matter what the goal --an endowment campaign will last from 12 to 16 months. It is possible to wrap up things sooner, but the process should not be stretched much beyond a year and a quarter. An endowment campaign that lasts longer runs the risk of extending over two annual campaigns, and a seemingly endless endowment campaign can damage the enthusiasm of an organization's volunteer base and its credibility with donors.

Many times endowment campaigns will be general in nature, seeking donations which will provide income to non-profit organizations for support of their operations. However, you can still create and offer commemorative naming opportunities because they are symbolic in nature. Of the myriad programs and services conducted by an organization as part of its regular annual operation, many can be "packaged" and related to donors' gifts. Other campaigns are for the purpose of endowing a specific project, program, etc., and as such offer explicit naming opportunities. As membership categories in an annual campaign work to suggest contribution levels, so do naming opportunities for endowment and capital campaigns. Naming faculty chairs, artistic positions, medical departments, buildings, and so on allows an organization to establish a tangible reward for a major contribution. This is especially bolstering to solicitors. It gives them something to "sell." The reason a donor gives should be to benefit the organization, but a naming opportunity at a university, such as the Joseph & Louise Smith Professor of Economics Chair, can be a great incentive for giving.

However, naming opportunities do not always have to be taken as absolute literal. It is not necessary for the annual income from a particular endowment to equal the annual actual expense relating to the operation of the event, program or position endowed. Your suggested contribution amounts for certain named gift opportunities should be based upon the potential giving capability of your prospective donors. However, if the maximum potential contribution is not at an amount reasonably appropriate to the endowment opportunity, an organization should not conduct a "fire sale" and give the opportunity away.

Amazingly, one of the biggest challenges for endowment campaigns seems to be the creation of a suitable printed piece that presents the argument for the campaign. I have seen endowment campaigns actually languish and die because the organization could not come to agreement over design, number of pages, color, and phraseology. I believe this kind of impasse occurs more with endowment than annual campaigns because an endowment campaign is a very special event. Because it is not repeated every year, the previous year's material isn't there to serve as a model in developing a new brochure. Also the nature of an endowment sometimes engenders among campaign leadership and volunteers an inordinately great fear of not being adequately prepared to ensure success.

Campaign management should make decisions about the brochure and other similar materials early on and stick to those decisions. Documents and strategy should not be continually revised in an attempt to obtain the complete agreement of everyone involved on each and every point. Consensus is important to achieve in fund-raising, but consensus does not mean you give 20 members of a campaign committee veto power over the color, size of type, or choice of words used in printed support material.

What I am saying about endowment campaigns also applies to capital campaigns, but there is one big difference. Endowment money raised is going to be invested in order to produce future income to fund future, not fully defined, endeavors. Capital campaigns are for a closely defined and tangible purpose. Campaign leadership and volunteer solicitors know exactly where the money is going. They can even show pictures of it.

Those are my views on the subject. What are yours? I welcome your comments and suggestions: tony@raise-funds.com

• Capital Campaign Plan Outline (Applicable to endowment campaigns)
  http://www.raise-funds.com/exhibits/exhibit05.html
  http://www.raise-funds.com/exhibits/exhibit05.pdf
  
  
• Capital Campaign Calendar (Applicable to endowment campaigns)
  http://www.raise-funds.com/exhibits/exhibit06.html
  http://www.raise-funds.com/exhibits/exhibit06.pdf
  
  
• Capital And Endowment Campaign Tracking
  http://www.raise-funds.com/exhibits/exhibit37.html
  http://www.raise-funds.com/exhibits/exhibit37.pdf
  
  
• Capital And Endowment Best-Least-Likely
  http://www.raise-funds.com/exhibits/exhibit38.html
  http://www.raise-funds.com/exhibits/exhibit38.pdf
  
  

Addendum:

Making Your Endowment Funds Work

You have just read my article regarding the raising of money for endowment purposes. Anticipating the infusion of such money into your organization, or regarding endowment funds already raised by your organization, we move on to two subsequent issues:

1. Endowment fund investment, oversight and reporting.
   
   
2. How, if, and when you spend endowment fund interest and dividends---and how, if, and when you might need to "invade" any of the principal.

This article addresses Issue (2), and suggests the following guidelines.

Endowment Funds and Income: To Spend or Not to Spend

A non-profit organization currently holding endowment funds, or an organization which is planning to raise endowment funds for the first time, should give special attention to how the funds will be managed---not from an investment perspective as stated above, but rather how an organization will utilize the endowment income and principal in its operations. This endowment management policy should be instituted with the consensus of an organization's leading officials and advisors. It should be cited in an organization's bylaws, as well as entered and defined in its Financial Policy Manual. It's that important because it represents an organization's future.

The first issue to address would be about how the income from endowment is handled, then attention must be given to the principal asset (corpus).

(A) Endowment Income:

• determine IF the organization will spend any of the income, a set percentage of the income, or 100% of the income.
  
  
• decide HOW the organization will spend endowment income.
  
  
• plan to be flexible to allow for the reinvestment of any unspent endowment income.

When Spending Endowment Income or Principal, Be Aware of Donor's Wishes

Decisions of spending endowment income or principal are up to the organization's leadership. But the leadership must be acutely aware that it's quite often up to the wishes of the donors of endowment funds as well. That's where the common usage in the non-profit world of the words, "unrestricted" and "restricted" come in. And an organization's financial policy must also address those circumstances.

Endowment funds are raised mostly by soliciting money from donors on an "unrestricted" basis. This will allow an organization the flexibility to use its judgment regarding the best ways to spend the endowment income---and if necessary, the principal.

While any organization would welcome fair and reasonable requirements connected to "designated" endowment funds from donors, the organization must carefully review with the donors the mutual understandings, limits, conditions and expectations of such gifts--and to take special care to avoid conditions set forth by any donor which could cause the organization to stray from its basic mission.

Replace What is Spent

A condition should be set forth in the organization's financial policy that, should it be absolutely necessary to spend any endowment principal, those funds must be replaced by a designated date---the sooner the better.

Endowment is "Forever," But is the Program Which it Supports as Enduring?

As well, an organization should carefully review an offer of an endowment gift where the income is desired by the donor to be restricted for application to a specific program or service of the organization, especially a program or service which may have an uncertain future.

Since endowment is "forever," an organization should be concerned that the life of the endowed program or service might, in fact, be much shorter. If there is any chance that such a "perpetually" endowed program or service could later be discontinued, there must be clear understanding and agreement with the donor at the time of the donation regarding an acceptable alternative application of such funds, if and when that time comes.

The Last Word

Winning the trust of our donors is perhaps the most important thing we can do as we put to work any of the funds they contribute to our organization. How well we use and spend the money they give as their "investment" in our mission and vision, is especially critical when those funds are for endowment purposes. There is a sense of immediacy, even a conclusion, when donors give to current operations, programs, projects, and services. But giving to endowment conveys to those donors a sense of something to be effective in the long term and that it is permanent. Thus, these final words are provided to further encourage an exacting and consensus-driven practice when it comes to how those endowment funds are spent.

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Setting An Endowment Campaign Goal

How do we begin to set a goal?

You first set a "target" goal, based on what you must accept as very loose factors; those being the changing rates of interest (meaning changing amounts of future income), the sliding scale of actual endowment funds at work as the pledges are paid (often over several years), and the determination of the costs of the programs and services or operations (often undefined and undetermined) the funds will pay for or reduce their costs over how many years. Very indistinct and elusive factors indeed, as you can easily see---but worth the exercise to be as close as possible to an ultimate endowment campaign goal which is feasible, and which makes some sense.

When you set a goal for the campaign, do you later consider the goal achieved with pledges or promises of funds totaling the goal amount, or do you need actual cash in hand?

You work to the goal and cite the progress and the achievements to that goal by applying any money pledged or otherwise committed. Never declare ongoing progress or final results with cash payments only, because endowment campaigns are successful to the highest degree when you can offer multiyear payments of pledges to donors and prospects. And, some pledges could very well extend over many years. That is why there are pledge cards and letters of commitment used as staples of such campaigns; so donors can tell you as best they can of the schedule of the payments they can make on their pledges. This may be declared with an initial cash amount given, with the balance due to be paid at a given amount each year. For example, if the original pledge was $50,000 and you received $10,000 (or even nothing) initially, with the pledge designated to pay the balance over the next four years at $10,000 per year--- you log into the campaign the achievement of a gift in the amount of $50,000.

What if people wish to pledge something in their wills to the endowment campaign?

Never record such pledges as actual endowment campaign achievements. For one thing, the money you believe to be willed, might not be there when the person dies. As well, though your organization may still be named as a beneficiary, it could turn out that the estate does not have the funds remaining to make payment. More important, a will is a changeable thing, and anyone can make adjustments to it in their lifetime and you would never know it. Wills are important, of course, and should be deeply appreciated and treasured, but the realities I cited above make them very poor and unreliable instruments for future assets upon which you can count---literally and figuratively to an endowment fund-raising campaign. When it comes to the claiming of Planned Gifts to an endowment campaign, you only claim such gifts when they are irrevocable, such as charitable trusts, paid insurance policies, and the like. In short, only those Planned Gifts which you own, even if the donor receives income for her or his life. You own the corpus, thus you can post it (the "market value") to your endowment campaign achievement

How can we be reasonably certain that the goal we set will be met?

First and foremost, after you determine a preliminary "target" amount based on the variables cited above, you then get to work to review your viable and logical prospect base to rate and evaluate each and every one to determine if you have the potential to raise the money with the major gifts you must have for such campaigns. On that point, read my article:

--- Rating and Evaluating Prospects: Whom Do You Ask For How Much
http://www.raise-funds.com/498forum.html

And remember, when you identify the sizes of gifts you need at the various levels, you always must figure that you need about four to five prospects rated at those amounts because some will not give and others will give less. So, if you want to raise, for example, one gift at $100,000---you will need about four such prospects you have identified and rated for giving potential at that $100,000 level if you are to campaign, solicit, and receive that amount. Use the following chart as a guide:

--- Capital/Endowment Gift Table & Prospects Required
http://www.raise-funds.com/exhibits/exhibit97.html

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How Much Endowment Is "Right" For Our Organization?

• Is there a "standard" or "industry" percentage ratio of our endowment funds---funds working to provide annual income---which can have that corpus/principal amount relating to any of our key financial statements? Such as the annual expense budget, or the operating deficit, or our Annual Fund Campaign results, etc.?)

I have been asked that question many times.

My response is that I am certain there is no exacting standard. However, an endowment funds-to- operating-expense ratio is the one such "benchmark" at times sought by non-profit organizations---though there is no real justification or worthiness for such a number in any event.

At the time I was at The Cleveland Orchestra, such a ratio was promoted---"suggested"---by the largest and most influential granting foundation in our area. The idea was that endowment funds, paid and working in the bank, or otherwise invested, would be at a total amount of principal/corpus three times that of any organization's annual operating expense.

This was an unofficial "suggested standard" which was not imposed on organizations in any way for them to receive grant consideration, nor was there any kind of measuring rationale made by the foundation regarding that ratio. Why did they tout it then? Because, everyone recognizes that that there is a need to somehow, someway, measure the efficiency of non-profit organizations, and this was yet another attempt. I believe that no ratio of any kind, between working endowment funds and what an organization spends each year, would have any real meaning.

The Foundation-inspired three-times rule/guideline/objective/standard, whatever one chooses to call it, could have others could think that another percentage ratio number might be arbitrarily determined just as well. It could be two times, four times, etc., of the annual operating expense amount.

It seems obvious that any number of various organizations' spreadsheets, factored together in some way, could come up with a percentage ratio number, to be then applied across the board. But such methods are greatly flawed, as organizations interpret and report their financials in many different ways. Some have little, or no, earned income, while others have a high rate of earned income---variables which fly in the face of a fixed "standard" of most anything when it comes to measuring non-profitsʼ performances in a "one size fits all" way. How hard and fast, and how useful in measuring an organization's sustainability in that way, is open to question because, from one organization to another, many variables could be at work---to cite but a few:

1. Investment income yield is dramatically affected by where and how the funds are managed, and regarding types of securities, changing interest rates, etc.
2. The use of all, some, or none of the income from the principal/corpus to pay for annual operating needs. Or the use of the income to fund only new projects.
3. Invading some of the principal from time to time, then needing time to raise replacement money.

Thus, the formidable objective of having an endowment fund in an amount three times (or any number) that of the annual operating budget, or any attempt to set a standard, or even a benchmark, must be considered with many other factors than an organization thinking they have met, or are trying to meet, a truly meaningful goal.

So, how endowment funds should/must we have in hand anyway? Simply put; as much as you can raise which in no way will interfere with, slow down, or be a substitute for the best Annual Fund Campaign you can mount---year after year.

P. S.
I hasten to add that all such attempts to make meaningful measurements and to set targets for sustainability and to forecast outcomes are good and necessary---that is, until they are arbitrarily made as standards and are imposed on non-profits, large or small, across the board, when the financials are faulty, unproved, and decidedly unfair.

I have another article related to this issue which I recommend:

--- The Fallacy Of Financial Ratios:
Why Outcome Evaluation Is The Better Gauge Of Grant Worthiness
http://www.raise-funds.com/100402forum.html

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