Have you wondered why more NGOs don’t use endowment as a financial tool to become sustainable, reduce their reliance on donor money, and preserve and grow wealth? That’s how precisely university endowments in the US have become so prominent and influential.
Before we proceed further, what is an endowment? According to Investopedia1,
“An endowment is a donation of money or property to a nonprofit organization which uses the resulting investment income for a specific purpose. An endowment can also refer to the total of a nonprofit institution’s investable assets.”
Issues with setting up an endowment
It’s not so easy to set up an endowment. There are following barriers, especially for NGOs in emerging markets:
Lack of capacity to establish and manage endowments - nonprofits don’t have good talent and resources to allocate to build an endowment, as that is not their core competency.
Unstable investment environments or lack of access to investable assets - especially in emerging markets, the investment environment is not mature, and there are not many assets to invest in.
Limited or non-existent legal and tax framework - legal frameworks are not comprehensive and lack specific definitions and regulations for different types of nonprofit organizations, such as public and private foundations. This makes it even more difficult for community philanthropy organizations to develop and operate2. Additionally, the lack of a tax framework doesn’t let endowments utilize tax benefits that generally, US endowments benefit from their investments in capital markets.
Sources of endowment funding - very few philanthropists and donors are sophisticated enough to donate money to an endowment, especially in local and emerging markets.
Long-term vs. immediate needs - Lack of financial discipline and long-term focus - Most nonprofits are not used to financial wealth management, so they need the proper support and customer education.
Sustainability - Protection against a rainy day is one of the primary reasons for creating an endowment to help them survive crises like the COVID-19 pandemic when financial markets are distressed and donations decline.
Mission-hedging - Endowments under public scrutiny
Another issue that I see with existing endowment investments is that still most of the investments are in industries that are not in ethical and impact alignment with the vision and mission of these nonprofits. That leads to a considerable market gap of ethical, mission-aligned, impact, or conscious investments only with an endowment. Though there is a point to be made around mission hedging, how it just not gives more financial returns, but also those returns can be used to invest or donate to mission-aligned initiatives or organizations3.
I'm afraid I have to disagree with mission-hedging. I find it hypocritical to have that strategy anyway, as we are still increasing the demand for evil stuff by doing mission-hedging.
There is a substantial public sentiment against mission-hedging or endowments investing just for profit. Hence, we have seen a lot of uproar among the student communities to raise voices against their university endowment investments in fossil fuels, etc., and demand divestments. E.g., Harvard has been under public scrutiny for its investments in fossil fuel and other sinful industries4.
What can be done?
"Endowment funds are typically established by larger nonprofits. The average size of nonprofits without endowment funds is $9.6 million in total assets, but that number is 6.4 times higher ($61.5 million) among organizations with endowment funds.5."
So smaller nonprofits can't afford to have a complex structure like an endowment and manage it - hence digital nonprofit endowment product is needed to help nonprofits become financially sustainable over the long term.
What a programmable/digital endowment product can do?
It allows nonprofits to raise capital for an endowment, source & invest in assets that align with the vision and mission of the parent nonprofit, and able to receive returns that can be used for further investments or rainy day usage or covering general annual operational expenditures.
Precisely, what Angel Protocol has been doing, they have developed a web3 native programmable/smart/digital treasury management product that allows nonprofits to source donors, and deploy it in investable crypto assets (currently) to generate returns, hence preserve and grow wealth, to provide long-term sustainability. In the last six months, Angel Protocol has attracted more than 150 nonprofits, $ 6 M in TVL, to test its endowment product offering.
Angel Protocol is a web3 native protocol, reducing cost and time to launch, deploy and manage the endowment, with minimal middle and back office. We see many DAO tooling initiatives like SmartFunds, Syndicate Protocol, Seed Labs, etc., focusing on hedge funds, venture funds, and SPVs at reduced or zero, or variable costs. Hence, it democratizes venture capital and asset management by allowing people from diverse backgrounds to launch funds with minimal and zero costs.
“Solo Capitalists will abound, requiring a business-in-a-box, an operating system for the new web3 active manager.”6
Beyond Endowments
There are few to few protocols and projects in Web3 or otherwise providing technology infrastructure for impact organizations - whether impact financiers like impact investors or donors or changemakers like NGOs or impact ventures. So, Angel Protocol has created Angel Impact Funds, a natural extension to their programmable endowment, a multi-purpose social impact fund that is versatile in nature, i.e., it allows changemakers to fundraise and create endowments, impact financiers to coordinate and deploy capital.
Angel Protocol’s Angel Impact Fund is tailor-made for impact organizations across the impact investing spectrum, hence redefining global impact financing and accelerating the adoption of impact investing.
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Is endowment building a good nonprofit development strategy in developing countries?, Rick Cohen and Almudena OcejoHarvard'se Magazine
A generalized strategy of ‘mission hedging’: investing in 'evil' to do more good, Effective Altruism
The Moral Stain on Harvard’s Endowment, The Harvard Crimson
The Risk, Reward, and Asset Allocation of Nonprofit Endowment Funds, Andrew W. Lo, Egor Matveyev, and Stefan Zeume