December 28, 2008

Tips for starting a charity endowment from scratch

Q. We'd like to start an endowment for our charity. What steps should we take?

A. First, determine whether your organization is truly ready to start an endowment, says Diana S. Newman, author of Nonprofit Essentials: Endowment Building. Creating an endowment is not an activity for fledgling charities, she says: "If you're brand new and you're struggling to keep the door open, you need to solve that first."

But for established organizations, "an endowment is a great long-term development strategy," says William B. Pratt, a fund-raising and management consultant in Helena, Mont., who works with nonprofit organizations. In other words, he says, if your charity has five to 10 years under its belt, a good reputation for getting the job done, solid finances, strong leadership, a large pool of donors, and the manpower and willingness (among staff members, board members, and volunteers) to embark on a time-consuming, open-ended fund-raising effort, then starting an endowment is a great way to ensure the charity will have enough money to stick around for the long haul.

Next, you need to raise the money that will go into the endowment. Asking for endowment dollars can be harder than other types of fund raising, says Kyle Caldwell, chief executive of the Michigan Nonprofit Association, an umbrella group in Lansing.

"Every donor's going to want to know why do they want to give to an endowment as opposed to giving directly to the cause to see their dollars used right away for services," he says.

For that reason, Ms. Newman says, "you need to be clear about why you want to build an endowment," and come up with a case for it.

One argument you can make, she says, is that building an endowment is "adding another leg to your stool. An endowment will give you money forever and at a countable rate." More specifically, she says, get your staff and board to think about long-term goals and what it will take to achieve them.

Endowment fund raising is different from raising money for annual operating expenses or capital projects in an important way, Mr. Caldwell says: It doesn't rely on liquid cash. "Endowment wealth is often tied up in investments or property," he notes, which means an organization needs a sophisticated development department that understands such things as wills and charitable remainder trusts. If you don't have such expertise on your staff, you might want to seek help from a planned-giving consultant, he says. (The Chronicle recently wrote about the use of planned gifts to build endowments at small charities.)

While the uncertainty of today's economy may make conversations with donors about giving more difficult, Ms. Newman says this is a better time to ask for endowment gifts in the form of bequests and other long-term investments - rather than, say, asking for cash to improve a charity's facilities. "There's a lot of things people can still do that won't be affected by the economy," she says. And, she adds, it is a good bet that, in the future, when a charity cashes in those gifts, "the stock market won't be as lousy as it is today."

Your endowment fund-raising plan doesn't need to be complicated, she says. To start, it can be as simple as encouraging donors to put your organization in their will, she says. To achieve that goal, you don't need additional staff members, she says. Simply drive the message home in every communication with donors, from newsletters to annual reports to e-mail messages to annual-giving pledge cards. Over the years, you can build your way up to promoting other types of planned giving, she says.

Even before the first gift comes in, you'll need to decide how you will manage the money. Mr. Caldwell and others say small to midsize charities should consider using the services of an investment management firm or a community foundation. "I don't recommend that they start striking out on their own, going to a bank and setting up an endowment," Mr. Caldwell says. Doing so could sap a lot of time and energy that would be better directed toward a charity's programs, he says.

For more information about starting an endowment, see The Chronicle's previous article on the topic.