Funding

Funders Want to See “Skin in the Game.” Here are Three Ways to Show It

Image: Shutterstock

Image: Shutterstock

If a nonprofit leader is plotting a bold new move, he or she generally needs to inspire new support from a range of partners and donors in order to pull it off.  But how to do this when the new undertaking involves significant risk?

Careful research, a well-conceived business plan, and a clear and compelling pitch are certainly critical to developing buy-in. But my client work suggests another opportunity to inspire confidence from potential partners in the face of uncertainty that many nonprofits miss.  

Demonstrating that people have “skin in the game” – or have made specific commitments to the field of play – can have a powerful influence on those still standing on the sidelines. The term “skin in the game” is often used in business and finance. But in the nonprofit context it can refer to much more than monetary investment. And the “skin” can come from valued partners, the nonprofit itself, or the community it serves.

Here are three ways I’ve seen this work.

1. Put a dollar amount on in-kind contributions  

One of our clients had ambitious plans to take a pilot program and scale it up to serve a significant portion of all pre-K students and their families in a major urban school district. The program had strong evidence of effectiveness and the growth plan was well conceived. But the plan relied heavily on philanthropic funding, none of which had been committed yet.

In preparation for a meeting with a room full of funders contemplating investment in the plan, we worked with our client to make the Department of Education’s support for the plan concrete. While the DOE was not committing dollars to the program, they were committing their buildings, significant time from teachers and administrators, instructional hours, and professional development time. We put a number value on these critical resources. The total was impressive and helped inspire the major philanthropic investment that followed.

2. Show concrete commitments from credible partners

Another nonprofit I worked with asked its long-term university partner to make specific commitments to gathering and analyzing data on the effectiveness of a program the nonprofit hoped to launch. The commitment of intellectual resources from a respected university increased the credibility of the program to potential funders and other program partners.

But what if you don’t yet have a partner whose commitments you can leverage?

3. Lead before asking others to follow

Nonprofits can start with putting their own skin in the game. That can look like 100% Board giving to the new plan, over and above their gifts from the prior year. It can look like a major portion of their discretionary budget allocated to the new undertaking, or an investment in developing a strong business plan. It can look like a low-income community that raises funds internally through bake sales and barbeques before asking for external investment from donors. These efforts send a strong signal that the nonprofit has committed whole-heartedly to its plans and will see them through.

At the end of the day, showing skin in the game helps potential partners breathe easier, knowing that risk is shared and commitment is strong. 

A Good Case for an Endowment

Image: © Rfischia | Dreamstime.com

Image: © Rfischia | Dreamstime.com

I recently heard the story of a donor’s gift to his daughter’s private school. Not, as one might expect, a shiny new fitness center or maker space – but a new set of much-needed storm windows, which would pay dividends in the form of energy savings for years to come. The condition of his gift?  The windows had to bear his family name. 

The story of the “Smith Family Storm Windows” is a compelling statement on the challenges that non-profits face in covering unglamorous expenses – like storm windows – that are nonetheless necessary to keep an organization running. By having the windows bear his name, this donor hoped to highlight the importance of supporting the general operations of the school to other donors.

It’s a story – and issue – that resonates with many of the non-profit managers that I work with at Wellspring. Donors are much more apt to support programs or fund new buildings than to provide unrestricted funds that keep the lights on (or the heat in). Often, this means that organizations must raise operational support through annual campaigns, special events, memberships, and so forth. These income streams can be unpredictable and there is an ever-present anxiety of missing the year’s targets.

For this very common dilemma, a solution we’re often asked about is building an endowment fund, an investment that is set aside for the long-term support of an organization. Only the income, or a portion of the income, is spent each year. An endowment represents the promise of a reliable income stream to cover operating expenses, fill occasional shortfalls, or even seed new work. Many eminent cultural, educational, and healthcare institutions have accumulated massive endowments – if Harvard University is doing it, many wonder why shouldn’t we too? Putting aside the question of whether Harvard actually needs $20 billion for a rainy day, is raising an endowment fund in fact a good fit for smaller non-profits?

I recently found myself pondering these questions while working with a mid-sized regional science center on their five year strategic plan. The center has thrived and grown over its brief ten year history, and has a very active board that’s committed to ensuring the institution’s long-term viability. Its campus, including its LEED certified building, cutting edge exhibits and extensive outdoor attractions, are beyond what you’d expect from a regional institution, particularly one that happens to be located in a fairly remote location. Less surprising is that these programs don’t come cheap – the operational expenses associated with maintaining this impressive infrastructure are a big part of the center’s budget.

The center’s leadership reached out to Wellspring Consulting to help them assess the institution’s long-term financial sustainability. In particular, they had concerns that finding ongoing support for the less “glamorous” aspects of museum operations, namely the maintenance and refreshment of their facilities, was getting more difficult over time, as donor fatigue set in. Some members of the board felt that the answer was the creation of a large endowment fund—the bigger the better, since a larger principal would mean more investment income, and therefore less pressure to raise other funds on a yearly basis. This makes perfect sense, right?

Up to a point, yes – a bigger endowment may be better, all else being equal, but in the world of fundraising that’s rarely the case. There are reasons why smaller organizations might wish to be modest in their endowment ambitions, or even avoid endowment fundraising altogether. The answer to whether a given organization should pursue this strategy needs careful analysis of its current financial and programmatic position, trajectory and goals.

Much ink has been spilled on often underestimated complications that come with building an endowment. Some potential downsides of these funds include:

  • Needing to be big. When it comes to the value of an endowment, size really does matter. To provide meaningful income, an organization’s endowment needs to be substantial relative to their yearly expenses. For example, if an organization has an annual budget of $10 million and it manages to raise $2 million in endowment funds (no small feat for many organizations of this size), that would only give them $100 000 dollars toward their expenses each year (assuming annual earnings of 5%), covering only 1% of the budget.
  • Robbing Peter to pay Paul. Raising enough money to cover current annual expenses poses a challenge to many non-profits, let alone trying to build a fund to cover future expenses. Donors may only be willing to give to one funding stream. Raising that $2 million for the endowment may reduce giving in other areas, including support for core programs.
  • Creating a need to feed the beast. A recent conversation with development staff at a private university highlighted another, less often noted, issue with endowments. Because the size of an endowment is easily quantified, it can become a measure of organizational success in and of itself. This can result in a focus on growing the endowment (to achieve ever greater success) rather than viewing the endowment as means to an end: that is, the creation of an important rainy day fund, or important revenue stream to cover overhead costs.

However, along with these challenges, there are potential upsides to building an endowment, even for smaller organization. Non-profits are understandably drawn to endowment building because, among other benefits, they may:

  • Attract large gifts. Individuals often prefer to make major gifts (including bequests) to support features or efforts that will remain in place long after they are gone. For example, universities and hospitals often receive major gifts that support new buildings, wings, or endowments from individual donors. Contributing to an endowment ensures that the gift lives on beyond the donor. (A corollary of this is that many organizations now require funders to cover future operating costs of buildings or programs they donate.)
  • Signal strength. The existence of an endowment can serve as a signal to donors that an organization will be around for the long-term. This may draw further support from those who wish to invest in an institution that has longevity.
  • Support operations and innovation. Because it comes in as unrestricted dollars, the income from an endowment can be used as needed in any given year—for example, to smooth out financial shortfalls in lean times, and can also be used to cover ongoing overhead costs (paying for those storm windows!), or even fund projects that are more experimental in nature and may put an organization on the cutting edge of its field.

In order to determine whether our client, the regional science center, should build an endowment, the Wellspring team collected and analyzed data from a variety of sources. We made our final recommendation after having engaged in the following activities:

  • Analyzed the center’s current financial status and built ten-year financial projections that accounted for multiple funding and expense scenarios.
  • Conducted interviews with existing and prospective donors to assess their willingness to support the center in the future.
  • Conducted interviews with Board members to ascertain their willingness to give to an endowment campaign and to elicit funds from those in their social networks.
  • Held in-depth conversations with the center’s leadership and development staff to gain a greater understanding of their capacity and support for conducting an endowment campaign.

After intensive analysis of our data, we concluded that this is an appropriate time in its planning trajectory for this science center to move forward with building an endowment. This decision is grounded in a deep understanding of the organization’s capacity, programs, and goals for its future. Key factors that led us to this recommendation include:

  • The source of the center’s future deficit is the maintenance of its impressive infrastructure. Covering this cost requires a reliable stream of operating funds, which is well-suited to the nature of endowment income.
  • The amount of investment income required to cover the center’s shortfalls does not require that they build a Harvard-sized endowment. The endowment goal is aligned with realistic levels of giving for this institution.
  • The center’s existing donor base is willing to contribute large sums in the form of bequests to an endowment.
  • The Board is committed to building a restricted endowment and is willing to actively engage in fundraising for this purpose.
  • The staff leadership of the center understand and are committed to making the investment needed to launch and implement a successful endowment campaign.

While the Wellspring team recommended that the science center pursue an endowment campaign, this should not be interpreted as a global endorsement of non-profit endowment fundraising. If anything, our research and analysis reinforced our belief that strategic and financial planning is not a one-size fits all endeavor. For example, if we had found that most of the center’s individual donors would redirect their support from the annual campaign toward the endowment campaign, we would have reached very different conclusions.

To return to the story of the Smith Family Windows, the school was clearly lucky to have a forward-looking donor willing to “invest” in mundane day-to-day expenditures. For some (but not all) organizations, an endowment fund can serve the same purpose.

The Messy Business of Social Movement Funding

I recently worked for a foundation that had admirable aspirations of creating large scale social change, potentially through a social movement. As we researched the business of social movement building, it proved to be a topic mired in caveats. In speaking with various funders throughout the country, we found that organizations’ timelines for shifting toward social movement building is a great unknown. Funders seeking to fuel this kind of change are in various stages along their journey, as shown by the graphic below. Some organizations have been on this trajectory for decades, while others are just beginning. But in every case, the tactical shift to building social movements as a means to fueling societal change certainly did not happen overnight.

Messy business picture v3 5Nov14
Messy business picture v3 5Nov14

One of the primary hesitations from these funders is their resistance to leading the social movement. The big question that these funders are grappling with is “how do we make a movement happen, without being the movement?” The funders understand that a social movement cannot be dependent on one organization, but to be successful, a movement must take on a life of its own, with the vision and energy coming from the community. Foundations can fuel the movement via funds, capacity building and strategic support during the ebbing periods, but cannot be the movement itself.

Funders’ apprehension to the term “social movement building” itself also stood out. The majority of funders with whom we talked noted that this language can be counter-productive. Even if they internally understand they are using the tactics of social movement building, they use language such as collaboration, networks and ecosystem to represent their approach, while avoiding the potentially stigmatized label.

It seems that a sizeable number of funders are more thoughtfully seeking long-term, deep social changes, requiring the tactics of social movement funding. An admirable goal, foundations should be prepared for a very long-term, difficult-to-define, ever-evolving journey.