How Do You Start a Nonprofit Endowment: A Step-By-Step Guide

Two women at a whiteboard mapping out endowment ideas

By Lori Kranczer

How Do You Start a Nonprofit Endowment? A Step-by-Step Guide

Starting a nonprofit endowment requires strategic planning, proper governance structures, and careful execution. This step-by-step guide walks you through the process, from initial assessment through launching your fund and beginning to raise donations. Whether you are establishing a small quasi-endowment or pursuing major donor gifts to fund your donor-restricted endowment, following these steps ensures your endowment is built on a solid foundation that will serve your organization for decades.

Step 1: Conduct a Thorough Readiness Assessment

Before taking action, honestly evaluate whether your organization is ready:

Financial Position Review: Examine your current financial statements. Do you have at least 6-12 months of operating expenses in reserves? Review your cash flow patterns over the past three years. Organizations without stable cash reserves should build these first before considering an endowment.

Capacity Analysis: Assess whether you have the staff or board expertise to manage an endowment. Who will oversee investments? Who will handle donor communications and reporting? Identify gaps in your capacity and determine whether you need to hire professionals or consultants.

Stakeholder Readiness: Survey your board members about their understanding of endowment management. Gauge donors' interest in legacy giving. Without enthusiastic support from these key stakeholders, your endowment will struggle to launch successfully.

Mission Longevity: Confirm that your organization's mission will remain relevant for decades. Endowments work best for organizations addressing ongoing community needs rather than time-limited problems.

If this assessment reveals significant gaps address them before proceeding. Starting an endowment before your organization is ready creates more problems than solutions.

Step 2: Build Your Case for Support

Create a compelling narrative that explains why your organization needs an endowment:

Define the Purpose: Clearly articulate how endowment income will be used. Will it support general operations, fund specific programs, or provide general operational budget relief? Be specific about the impact donors' gifts will have.

Quantify the Need: Calculate how much annual income your endowment should eventually generate to meet the goals you set. If you need an additional $50,000 annually and plan to distribute 4% per year, your endowment goal is $1.25 million.

Present Board Leadership: Do you have a board “Ambassador?” Develop talking points that help board members champion the endowment to their networks. They should confidently explain why building an endowment strengthens rather than weakens current programs.

Address Donor Concerns: Anticipate objections like "Why save for the future when you have needs today?" Prepare responses that acknowledge the current needs while emphasizing sustainability and long-term impact.

Step 3: Establish Governance and Policy Framework

Creating proper policies ensures your endowment operates smoothly and legally:

Choose Your Endowment Type: Select between permanent endowment (principal never spent), term endowment (spent after a specified period), or quasi-endowment (board-designated and more flexible). Many organizations start with quasi-endowments because they offer more control.

Draft an Investment Policy Statement: This document defines investment objectives, asset allocation strategies, acceptable risk levels, and who has decision-making authority. Specify whether you will prioritize growth, income generation, or capital preservation. Address whether socially responsible investing aligns with your mission.

Create a Spending Policy: Determine what percentage of the endowment will be distributed annually. Most organizations distribute 3-5% to balance current needs with long-term growth. Specify how distributions are calculated, for example it can be based on a trailing average of the fund's value.

Develop Gift Acceptance Policy: Document what types of gifts you will accept (cash, stock, real estate, bequests), minimum gift amounts, and how donor restrictions will be handled. This protects your organization from gifts that come with problematic conditions.

Establish Oversight Structure: Determine whether your full board or an investment committee will oversee the endowment. Define reporting requirements and meeting frequencies.

Step 4: Select Your Investment Advisor and Set Up the Account

Professional guidance significantly increases endowment success:

Research Investment Options: Interview Investment Advisors who specialize in nonprofit endowments. Avoid traditional financial advisors focused on individual investor since they may lack the specialized knowledge nonprofits need.

Evaluate Fiduciary Commitment: Choose advisors who serve as fiduciaries, meaning they are legally obligated to act in your organization's best interest. Ask about their experience with organizations of your size and their fee structure.

Consider Community Foundation Partnership: Many community foundations manage endowments for smaller nonprofits, offering professional investment management, administrative support, and reduced fees.

Step 5: Seed the Endowment

Many organizations hesitate because they think endowments require enormous starting amounts, but you can begin quite small:

Board-Designated Funds: Consider transferring a portion of existing reserves into your quasi-endowment. Even $10,000-$25,000 provides a meaningful starting point that demonstrates commitment and with consistency will grow over time.

Initial Fundraising Campaign: Launch a dedicated endowment campaign emphasizing legacy and long-term impact.

Step 6: Market and Grow Your Endowment

Once established, actively promote your endowment:

Create Donor Education Materials: Develop brochures, website content, and presentations explaining how endowment gifts work and their lasting impact. Include specific examples of what different gift amounts will accomplish.

Integrate Planned Giving: Train your development team to discuss bequests and other planned giving vehicles that naturally support endowment growth.

Celebrate Milestones: Publicly acknowledge when your endowment reaches significant benchmarks. This builds momentum and encourages additional giving.

Report Regularly: Provide annual reports showing investment performance, distributions made, and impact achieved. Transparency builds donor confidence and encourages continued support.

The Bottom Line

Starting an endowment is a significant undertaking that requires careful planning, but the process becomes manageable when broken into clear steps. By thoroughly assessing readiness, building strong governance, partnering with qualified professionals, and thoughtfully marketing your fund, you create a financial asset that will support your mission for generations. Remember that successful endowments start small and grow over time. The key is taking that crucial first step.

If you are looking for support in creating or growing an endowment, please contact us at lori@linkphilanthropic.com for a free consultation.

About the author:

Lori Kranczer is the founder of Link Elevating Philanthropy, a boutique nonprofit and philanthropic consultancy in New York City.  

Connect with Lori on LinkedIn.