Q&A: Tips on Raising Money for an Endowment

Related articles: View all of the advice and commentary from this special supplement on endowments
Robert F. Hartsook is chief executive officer of Hartsook Companies, a fund-raising consulting company in Wichita, Kan., that he founded in 1987. Mr. Hartsook has written five books on fund raising and offers a seminar series nationwide to educate nonprofit organizations on how to raise endowment funds without damaging efforts to bring in donations for annual operating needs.

Q. How does an organization know when it is time to build an endowment?

A. Institutions must carefully look at why they want an endowment. Not every organization should or must have one. If raising money on an annual basis is a challenge, then maybe the focus should be more on how to do that more efficiently and effectively than to establish a fund that only distributes a small percentage on an annual basis. At the same time, an endowment is a great way for donors to feel that they are providing a sustaining impact on the health of an organization. Having significant resources is always an asset, but if the endowment diminishes some other funding opportunity, they should not have it.

Q. Some charities are putting off raising money for an endowment, and choosing instead to pay off mortgages or take care of more immediate needs. Is that a mistake?

A. With interest rates so low, it would not seem to be a good time to be paying off mortgages. However, mortgages can be a noose around a nonprofit organization’s thinking process. Raising money to build an endowment is much more attractive than raising money for a mortgage payment. But if immediate needs are being neglected to build an endowment, then it’s a bad idea.

Q. Do you have any general advice for charities as they seek gifts for an endowment?

A. There is no formula for developing an endowment. One independent school took 12 percent of all funds raised every year and put it in an endowment. The school raised $300,000 to $400,000 a year, so $36,000 to $48,000 was saved each year. After 10 years, with earnings, the school had a half-million dollars, and with a few additional gifts, the endowment reached over a million. This is an unusual strategy, but it sends a message about how important the endowment is to the school. An institution must be in a position to believe that its mission and work will go on in perpetuity.

Q. What are some of the most successful fund-raising approaches for building an endowment?

A. The heart of any successful fund raising is the need to illustrate and demonstrate how this fund and its earnings will have an impact on people. Having a large bank account is not a persuasive motivation for giving money. However, giving an endowed scholarship so that a student can get an education and contribute to society is a very attractive motivation.

Q. What are some of the least successful fund-raising approaches?

A. Giving for operating needs or for a building is more easily understood: We all know what a homeless shelter does. Many fund raisers discuss the idea of an endowment in the same way as they would operating funds or capital needs. But as a society we do not have the same common understanding of what an endowment is or does. Fund raisers have to illustrate why and how their endowment will make a difference.

Q. To what extent does the size of the endowment affect the fund-raising approaches?

A. Donors are attracted to success, and so older, established institutions with a history of success with the programs they offer and with fund raising are good targets for endowments. New organizations have a difficult time illustrating the need for perpetuity giving since they have not demonstrated that they are going to be around.

Of course there are notable exceptions in both cases. Prior to the big stock run-up of the ‘90s, the most common means of creating endowment support was through the inclusion of the agency in the estate plans of their donors. This is still a significant source of endowment.

Q. Some charities have found that they’ve tapped out their donors during an endowment drive, and then aren’t bringing in the annual gifts they rely on. How can organizations avoid that?

A. Pay attention. This happens when agencies are not clear about their needs or not candid about their plans.

Q. The economic climate of the past three years has made fund raising more difficult. How can organizations overcome that challenge when it comes to enticing donors to support endowments?

A. Traditionally, endowments were funded in significant measure through estate gifts from donors who cared about the institution. In the hot economic times of the ‘90s, many endowments grew because of their investments and because of the resources of donors to make outright gifts. Continuing to encourage the inclusion in estate plans still is critical.

The issue of tough economic times is, in my judgment, a nonissue. Gifts to foundations and to community foundations grew significantly during this period. Those organizations function much like an endowment.

Q. Are any types of donors more likely to support endowments than others?

A. Individual donors are the best prospects for endowment giving. Corporations don’t want to give away their capital for it just to sit with only the earnings used. Foundations are effectively an endowment, so it seems redundant for them to give earnings to endowments just to have it reinvested. Usually those individuals who give endowment dollars understand how and why these funds can assure the long-term future of the institution.

Q. How can organizations that have large, established endowments continue to persuade donors that there is a need?

A. One of our clients is a large hospital that has a significant endowment, and there are some who believe it is enough. All a hospital has to do is talk about the impact that having a large endowment can have on quality health care. Hospitals have a great opportunity because we all know the high cost of medical care is consuming a large share of our gross domestic product. As a result, institutions must present the magnitude of endowment necessary to fund new initiatives, added programs, research breakthroughs, and quality of care. How much is too much when you are trying to provide the highest quality of care and accessibility by all populations? The answer is no number is too high. This is true of virtually all other venues or targets of philanthropy.

Q. At what point, if any, does an endowment grow so big that it becomes a turnoff for donors?

A. When the endowment is not being accessed to support the mission of the organization.

Organizations are not always clear about the use of the proceeds from an endowment. They do not report that the funds to do this, or that came from the John Doe Endowment for the Advancement of Mental Illness. They just use it to balance a budget. But if they looked for specific things within the budget — like new playground equipment for a day-care center — that’s more attractive to the donor than just saying, “Thanks for balancing the budget.” The financial net is the same.

You also have institutions that limit the spending policy of the endowment so severely that it restricts the institution’s use of the money. Obviously we need to be concerned about the perpetual use of the funds, but endowment managers should know that the purpose of the endowment was not to have money stored away so significantly that the institution never really uses it. Effective communication of the use of endowment funds can generate more funds from donors and others who read about how important these funds have been.

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Section: Endowments
Volume 16, Issue 16, Page B21