Over the past year, Engaging Places has been looking over individual segments of the museum field. While these segments are unique in specific ways, as demonstrated by the data, several of them do share a common theme and mission: an overall goal to promote history. These four segments are History Museums (A54), History Organizations (A80), Historical Societies & Historic Preservation (A82), as well as the broad Museums (A50) category. By combining these segments we can focus on the history-centric portion of the museum field that makes up close to half of its revenue and consists of a whopping 89% of its institutions (see Figure 1). This block of museums is incredibly dominant within the field and a major focus of Engaging Places’ work. For ease of reference, we will be referring to them as History-Focused Organizations.
It is important to remember that as an aggregate these History-Focused Organizations still trend small. Over 90% operate on less than $1 million in revenue annually, with contributions and grants bringing in over half of that vital revenue. For these smaller museums, financial security is a constant and essential priority. While many of these History-Focused Organizations are unable to achieve large pools of investment to stabilize operations, unlike some of their larger counterparts, they can develop practices to move them in this direction.
The IRS defines investment income as dividends, interest, and net gains on investments. Investment pools of non-profits, including both restricted and unrestricted funds, are commonly referred to as endowments.* These investment pools act as a consistent revenue source, decreasing an institution’s reliance on other less predictable revenue sources such as program fees or contributions. While gains or losses may fluctuate with each year, as long as the museum is spending less than the average growth (minus average inflation), this pool of funds should exist and grow in perpetuity. Here’s the magic: investment income allows the museum to live off its returns without depleting it. It’s a goose that lays golden eggs.
So how many “eggs” should an organization expect? If your organization’s investment revenue is less than 4% of your annual revenue (the average for organizations under $1 million in revenue; see Figure 2), rethink your financial strategy/consider how you might increase your performance level. An overwhelming majority of History-Focused Organizations bring in between 0-5% of their revenue from investments (see Figure 3).
As total revenue increases, investment income increases to an even greater degree. Organizations with more than $10 million in annual revenue receive an average of 8% of this revenue from investment income (see Figure 2). Large mature institutions that have had time to build disproportionately large endowments can pursue a more aggressive approach. For example, Yale University uses their existing large endowment to pursue lucrative alternative investment opportunities such as private equity that are beyond the reach of small non-profits. This allows their endowment’s returns to outpace smaller non-profits, allowing them to lean even more heavily on this revenue stream. Those financial opportunities, unfortunately, are not possible for most History-Focused Organizations with annual revenues of less than $1 million. So what can they do?
There is no one-size-fits-all approach to endowment management, and endowments of different sizes should be managed differently for optimal results. An institution with $250,000 in revenue may have its board manage investments, at $2.5 million an external investment management firm, and at $2.5 billion an internal investment management team. As mentioned in regard to Yale, this greater scale offers access to different endowment strategies that can provide higher yields. History-Focused Organizations with less $1 million in annual revenue should first determine if they are underperforming the average (that is, receiving less than 4% in investment revenue), and then develop a reasonable target for your budget and a plan to get there.
Recommendation #1: Know the average rate of return of your investments (e.g., current value compared to a year ago) and how it compares to the current rate of inflation. If your investments are not keeping up with inflation, their value erodes. Meeting or exceeding inflation is a standard benchmark for long-term financial success.
Recommendation #2: Know how much your investments contribute to your annual revenue by calculating the percentage of revenue from investments for the year. If it is less than 4%, it’s contributing less than the average History-Focused Organization of less than $1 million in annual revenue.
Thanks to the financial data available for the field, we have a new benchmark to measure performance. Figure 4 shows the percentage of revenue from investment income for History-Focused Organizations operating with $1 million or less in revenue, with the orange horizontal line representing the average of ~5%. Organizations in group A generate investment income above the average, while group B fall below the average. Group B organizations seeking financial stability should look for ways to increase investment income to meet or exceed this benchmark trend line of ~5%.
Remember, the percent of annual revenue from investment income is not the same as your endowment draw rate. Increasing the draw rate may cause your yearly investment income to grow in the short term, but it could also undermine the size of your endowment in the long term. Instead, focus on growing the size of your investment pool to sustainably increase investment income.
Assembling the pool of investment funds to provide yearly income to rise from B to A is tough. In her recent book Endowment Essentials for Museums, Rebekah Beaulieu reminds us that, “fundraising for endowments can prove challenging, often because it requires investments in an organization’s future without immediate results.” While we all dream of an angel donor will present a transformative check one morning, the more grounded approach is to assess the needs and capabilities of your museum and take deliberate steps to improve your endowment fundraising.
What these steps may be depends on the capabilities and capacity of your institution. If you are a smaller organization, the first step may be as simple as establishing an endowment and promoting planned gifts, such as bequests, to the fund. This would be the simplest and lowest effort opening move on the mission to secure investment income. While results would not be immediate, this positions you to begin developing messaging on the steps you are taking to secure your museum’s long-term financial future to your most dedicated donor audience.
Remember, how you approach thinking about your endowment likely does not completely align with how your donor base does. You may want them to donate in order to have funds to cover the electric bill each year, they likely want to donate to make a long-term impact on an institution they love with a legacy of support. It would be wise to keep the messaging focused through their lens, rather than the nitty-gritty nature of operational expenses. This is important to remember when stewarding those you know have given you endowment funds or indicated to you that they have left you in their estate plans. Don’t take bequest intentions for granted, donor’s can change their minds and wills if they later feel ignored by your organization or if your priorities no longer align. Touchpoints and messaging on institutional accomplishments are a must to keep these long-term planned gifts secure.
Recommendation #3: Reduce the draw from investments if you need to prioritize growth. If your institution has down the basics the next step may be considering actively soliciting your base for these endowment gifts. This would require further honing of messaging and inspiring a reason to give. Some institutions may not even draw from their endowments on a yearly basis. Small institutions may strategize to have yearly returns grow their endowment without spending it down until it matures to a more respectable size. Others, such as the large Shedd Aquarium, may keep withdrawals at less than .5% on a yearly basis while saving funds for massive capital projects. Be sure to consider how you use your funds when developing this messaging. Not using endowment funds in a demonstrable way may discourage donors from directing donations to your endowment over other philanthropic priorities.
Recommendation #4: Wrap an endowment campaign into a larger comprehensive campaign. The most robust plan would be to launch an endowment campaign as part of a larger comprehensive campaign that includes other priorities. Remember, most museum revenue comes from fundraised money. Focusing solely on an endowment campaign could cannibalize donations that would otherwise support the necessities of the present. This is of course a multi-year effort that would likely involve significant investments into your fundraising capabilities.
These challenges can seem overwhelming at first glance. Are you correctly determining your short vs. long-term priorities? Will you be able to generate enough income during the campaign? Can your donor base provide what you ask of them? Is your development team capable and resilient enough to manage a campaign? Careful deliberation is a must before embarking on a multi-year endowment campaign and we recommend Beaulieu’s book to provide a guide and template for small museums seeking to explore this option.
Recommendation #5: Create or review a gift policy, the document that creates boundaries and guidelines around the gifts you accept. In Beaulieu’s Endowment Essentials for Museums, she includes twenty pages of sample policies and procedures to help avoid common pitfalls. For example, larger amounts of money can often come with strings attached. These policies can help guide you away from potentially alluring but messy gifts such as a particularly troublesome real estate gift that could get your small museum and you in over your head. Often they are used to establish standards and minimum expectations for naming opportunities, endowing staff positions, lecture series, or collection care. Keep it simple and manageable, and remember to avoid making exceptions for that “special board member.”
With all these recommendations surrounding rates of return, current financial support from investments, draw rate, comprehensive campaigning, and gift policy in mind its always good to remember that you should proceed with utmost care when engaging with your museum’s financials. With any of these recommendations, you may need to rethink your financial strategy and tolerance for risk. Having covered investment income for History-Focused Organizations, our next article will focus on their largest revenue stream, contributions and grants. Unsurprisingly, this is another revenue stream that is driven by investing in your museum’s fundraising capacity.
“Annual Report and Financial Statements | Shedd Aquarium.” Shedd Aquarium. Accessed December 22, 2022. https://www.sheddaquarium.org/about-shedd/vision/annual-report-and-financial-statements.
Barden, Pamela and Stanley Weinstein. The Complete Guide to Fundraising Management. New York: John Wiley & Sons, 2017.
Beaulieu, Rebekah. Endowment Essentials for Museums. Lanham: Rowman & Littlefield, 2022.
“Overview of Yale’s Endowment.” Yale University, November 17, 2022. https://www.yale.edu/funding-yale-home/overview-yales-endowment.
*Expanded IRS definition of Investment Income: Dividends, interest, and other similar amounts + income from investment of tax-exempt bond proceeds + net gain or loss on securities or other.