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The Endowment Trap: Hoarding vs. Helping

Here's a controversial hot take: The qualified endowment sucks as a fundraising plan.

 

Sure, for those who have spent years or decades building one up, you may have a dramatically different set of feels regarding them. But if you're a small or medium-sized nonprofit, run away from it like a personal invitation to a P-Diddy after-party.

 

Harvard’s endowment now sits at a staggering $50.7 billion.

 

I need you to just sit with that number. 

 

Over $50 BILLION - with a "B."

 

This continues to spark conversations inside the nonprofit sector about the sustainability and ethics of these massive funds, and just as important - gatekeeping potential funds from causes that would make communities better nearly immediately if they had access to even a fraction of the revenue made on the investment return on that fund.

 

And while endowments like Harvard’s serve as financial lifelines for many institutions, their rigid structure can make them feel like well-guarded treasure chests—shiny and impressive but not always accessible when immediate needs arise.

 

Think Smaug from The Hobbit. A giant dragon hoarding wealth under the mountain, and defending it with fire, brimstone and threats to the surrounding livelihoods of people if anyone should even think about asking for a single golf coin or gem.

 

What makes this stockpile of money even more infuriating - probably even to Harvard - is that 70% of their distributed funds are restricted for specific programs - which limits even the slightest flexibility in addressing emerging challenges or funding urgent priorities like student support or community initiatives.

 

And if you think my issue is with Harvard, it's not. To paraphrase my friend Rhea Wong - "Go get that money, honey." 

 

However, it IS a reflection of how endowments, especially large ones, are often treated as a cornerstone of financial security and encouraged by investors, community foundations galore as the "Glorious Ultimate Source of Fundraising Status and Donor Desires."

 

But here’s the kicker: that mountain of money—while impressive—doesn’t necessarily translate to high returns or the ability to spend nearly any of it as a rainy-day fund. 

 

And in case you haven't been outside lately, it's freaking pouring out.

 

The harshest critics of endowments argue that these funds sometimes act as glorified tax shelters for wealthy donors, contributing to limited philanthropic impact beyond what they lock into these accounts year after year.  Even Harvard, despite its wealth, reported distribution increases of only about 4.5% annually from the endowment to operations.

 

Side note: Can you imagine looking at a bank account with billions upon billions of dollars that you aggressively solicited for decades, only to not be able to spend any of it on the urgent needs you used to fundraise for it? 

 

We might have a new definition of insanity gang. 

 

So, what’s the alternative?

 

How can small or medium sized mighty nonprofits reject this classic "Well-We've-Always-Done-It-This-Way" model, but still enjoy the financial benefits of a long-term funding strategy so you can make immediate impacts?

 

I'm glad you asked - because I've been obsessively thinking about a few solutions and came up with a super cool list. 

 

 

  1. Let's Start with the Obvious: Donor-Advised Funds


Think of Donor-Advised Funds (DAFs) as an agile, modern approach to giving. Unlike traditional endowments, which can be complex and slow-moving, DAFs allow donors to make charitable contributions, receive immediate tax benefits, and remain actively involved in recommending how the funds are granted. Here’s why this approach can be beneficial:


  • Flexibility in Grantmaking: With DAFs, donors have the flexibility to decide which charities receive grants and when those grants are made. This means funds can be deployed quickly to address urgent needs, unlike traditional endowments that may have more restrictive processes.


  • Attracts Different Types of Donors: DAFs can appeal to a broader group of potential donors, particularly those who want to see the immediate impact of their gifts. This model is perfect for those who don’t want to lock their money into an endowment indefinitely but still want tax benefits and the ability to influence the direction of their giving.


  • Reduced Administrative Burden: For nonprofits, DAFs can be easier to manage compared to the complex governance required for endowments. Donors manage their own DAFs through financial institutions or community foundations, taking the administrative burden off the nonprofit while still receiving the funds.


  • Strategic Giving: DAFs provide a structure for donors who want to plan their giving over multiple years without the need to make immediate disbursements. This allows donors to contribute during high-income years to maximize tax benefits and strategically distribute those funds over time to causes they care about.


Now, before you think this is the greatest solution of all time and jump immediately into selling this as an option - remember that there is ZERO timeline on when donors have to distribute funds. They can grow this account through giving directly to it, investing and increasing the value with no tax implications, and are not required to give any or all currently. 


There are several bills that Congress is considering forcing action on holders of DAF's - which is a GOOD THING. Nay, a GREAT thing. Let's get that money out to WORK instead of turning into the NEW version of an endowment. 


  1. Oh, Fun Sounding Idea: Create Impact Funds!


Think of impact funds as a way to tailor your funding strategy to meet the most pressing needs of your organization. Instead of having a single large endowment that feels inaccessible, these smaller funds allow for focused, meaningful support for specific areas like programs, capital needs, or even emergency relief. Here are some of the benefits, especially for those unfamiliar with this concept:


  • Flexibility and Visibility: Unlike large endowments that can be difficult to mobilize, micro-endowments are easier to access and deploy. Each fund is earmarked for a clear purpose, which makes it more straightforward for your team to use the money effectively. This also helps you communicate the impact to donors, making it easier for them to see where their money is going and how it's making a difference.


  • Tailored Impact: Because these funds are set up for specific purposes, they allow you to address particular needs or opportunities within your organization. For instance, you might create an impact fund specifically for educational outreach or facility improvements. Most importantly, this targeted approach connects with donors who care deeply about a specific aspect of your mission, making it easier for you to attract support!


  • Predictable Revenue Stream: By establishing several funds your organization can create predictable and stable revenue streams that support ongoing work. This helps you plan better, knowing that specific areas will have dedicated funding. Plus, these funds can grow over time, ensuring sustainability without the need for an enormous, monolithic endowment.


Now, you might say, “Patrick – this sounds like so many things to track…and an auditor’s nightmare!”


I say, yes. It is a bit more than just ONE fund to manage…but think about the hyper-personalization you can engage with your donors!


Also, you pay your auditors a boatload of money. Give them something fun to do!

 

  1. Let's Get Crazy - Craft a Spend Down Strategy


Think of Spend-Down Strategies as a way to prioritize the impact today rather than accumulating money indefinitely for an uncertain future. Simply create an ask to build up a pool of money - and announce a specific date when it must be spent by, and thus when the donations will begin to make impact. Here’s why this approach could be beneficial for nonprofits and donors alike:


  • Immediate Impact: By committing to spend the funds within a specific period, organizations ensure that the money is used for current programs and needs. This approach allows for timely responses to pressing issues and helps the nonprofit stay relevant and impactful in the community. And? Great for content to report back to your donors...for more gifts!


  • Encourages Active Stewardship: Spend-down strategies encourage nonprofits to focus on delivering results now, rather than planning for a distant future. This can lead to more innovative and ambitious programs that demonstrate the immediate value of donors' contributions, making it easier to engage and retain donors. Your community needs it now. You know this. Now your donors do too.


  • Increases Urgency and Donor Engagement: When donors know that funds will be used within a set timeframe, it adds a sense of urgency and importance to their contributions. Urgency is always a great fundraising tool Donors are more likely to feel their gift is being used effectively and not just sitting in a fund for years without a clear purpose.


I think donors will jump at the opportunity to see a timeline on when their gifts will see the light of day, and in action. It’s almost involving them in real time. And that’s a unique gift you can offer supporters that no one else can!

 

Listen, while the original idea of endowments was ensure long-term stability, they aren’t the most effective way to address immediate community needs. And it now looks like, especially in the case of Harvard, like they are a tool for the ultra-wealthy to hoard money.


For smaller nonprofits or those just starting, the temptation to emulate this very old way of thinking and fundraising model will prove unsustainable and frustrating—especially without the luxury of billion-dollar distributions. Nonprofits need to focus on innovative approaches that leverage existing donor interest while meeting today’s needs with agility. 


Be as quick as you can to serve as many as you can. 


In a world where philanthropy must be both timely and transformative, its well past time we think about doing something different. By offering alternatives such as DAFs and impact funds, nonprofits empower their donors to see the fruits of their generosity in real-time—without locking themselves into a system that may not serve their mission well.


If we truly want to inspire lasting change, it's time to ask: Do we want to build a dusty old monument to financial security or a living checking account to address needs now?


Grab your rain boots. Time to slosh through puddles to change the world. 


You got this!


-Patrick

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