Building trust-based capital through nonprofit endowments

A new generation of philanthropic leaders are pressing forward to develop more ways to make a greater impact on the communities and issues to which they are dedicated. Today, more than ever, grantees need greater capacity and more predictable long-term funding streams to ensure they have the infrastructure resources to sustain themselves and their work of advancing economic and social progress.  

Nonprofit endowments are part of an emerging trend in trust-based philanthropy focused more on structural change to achieve a multiracial democracy. As research conducted by the Schott Foundation for Public Education and Candid shows, leaders of color and their organizations—who are at the core of this work—remain grossly underfunded, despite philanthropy’s stated commitments to advancing racial justice. Yet, many funders are hesitant to fund endowments. What are the power dynamics behind that hesitancy, and how can we create space for conversations around this challenging topic? 

Nonprofit endowments support stability, infrastructure, and ‘civic return’ on investment 

Traditional grantmaking in the form of short-term support or single-year grants forces organizations to have to ask for funding continually, with no stable or predictable financial future. This ensures a power dynamic in which the foundation maintains control and power. By contrast, funding endowments creates trust-based capital, with management supports, without strings attached. They shift the power of capital to organizations themselves. This long-term commitment allows groups to gain the financial stability, permanent infrastructure, peace of mind, and strategic power they need to generate the “civic return” on investment.  

Two $5 million endowments funded by the Grand Victoria Foundation—one to an established nonprofit and one to an emergent one—offer a glimpse into the benefits of endowments. Both organizations benefit greatly from the general operating support they receive in interest generated from their endowments—resources that most organizations don’t have.  

For the more established organization, the endowment has enabled it to become a strong, stable presence. It allowed the nonprofit to effectively manage two executive leadership changes from a long-term, high-profile executive director to a next-generation woman of color, who has evolved the organization to meet current social and economic challenges. Last year, facing a cash flow crisis, the organization was also able to rely on the endowment drawdown.  

The emergent organization used the drawdown from its endowment to significantly expand its scope and scale of work. The general operating support set a base of stability from which the organization could launch new activities and initiatives. The leaders also used endowment advisors to help them think differently about financial strategy. They maintained an explicit mode of growing the work and building out the organization—and the endowment had a catalytic effect on what they could accomplish.   

Long-term resources like nonprofit endowments reduce ‘opportunity risk’ 

Critical to conversations and assessment of funding endowments is reframing the conversation of risk—that is, to think about risk from the perspective of what won’t get done in service of our missions without the stability that long-term resources provide. The Grand Victoria Foundation is structuring short- and long-term resources to fulfill its mission as a part of its fiduciary responsibility. While an investment manager helps fulfill its fiduciary responsibilities, the foundation’s management team ensures the resources are activated to achieve its mission. 

As the philanthropic sector evolves, foundations need to think about using more of their investment portfolios to increase the capacity of racial justice organizations to fulfill their missions and accelerate changemaking. Endowments and long-term funding are ways that philanthropy can innovate in the service of mission.  

All industries innovate. One could argue that philanthropy, for all its purpose, has stayed pretty much the same—far too many philanthropies remain in single-year grant cycles with racial justice partners. There have been innovations with respect to the grantmaking process and decision making, like participatory grantmaking and trust-based philanthropy. Endowments go a step further by moving the sector from process and procedure to sustainability and power, from trust-based processes to trust-based capital. 

Leaders can educate peers and boards about nonprofit endowments 

The Schott Foundation’s EndowNow campaign is opening up new considerations for philanthropy. The foundation hopes to see family foundations, donor-advised fund (DAF) account holders, and other philanthropists exploring new sets of options, including nonprofit endowments. Instead of thinking solely about how to distribute grants, they can consider how to distribute wealth and power.  

It is the responsibility of sector leaders to help colleagues and board members realize they can leverage their power to achieve their missions in different ways. This is why the Field Foundation of Illinois invited colleagues to share their thinking and concerns about endowments. It is a powerful position to be in, to develop a relationship with an organization on the ground and re-commit to its work on an annual basis. But over time, as that relationship deepens, funders can make commitments to create the infrastructure needed to sustain and advance the grantee’s work. If we truly believe in the mission of a grantee, it’s time we act like it. By working with our colleagues and boards to expand the scope of what’s possible, we can provide organizations with the resources and power to make transformative gains. 

Photo credit: Florida Student Power Network