Web3 Programmable Endowments: new and improved!

web3 web3 programmable endowments

endowment image Have you ever wondered why most non-profits do not use endowments as a financial tool? Especially when university endowments have proven the use case to reduce their reliance on donor money, preserve and grow wealth, and become financially sustainable.

Before we proceed further, what is an endowment? According to Investopedia¹, it’s

“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 one up. There are many barriers, especially for NGOs in emerging markets:

  • Lack of capacity to establish and manage endowments – nonprofits do not have the resources or talent to build and manage them effectively, 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 prevents endowments from utilizing tax benefits that generally, US endowments benefit from.
  • Sources of endowment funding – very few philanthropists and donors are aware that their contributions could be used to power an endowment instead of one-time use, 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.
Mission-hedging – Endowments under public scrutiny

Another issue that I see with existing endowment investments is the approach to generate return. 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.

Though there is a point to be made around mission hedging’s ability to use returns to invest or donate to mission-aligned initiatives³, I believe it is possible to have a strategy that generates value outside of the traditional extractive model. 

There is a substantial public sentiment against mission-hedging or endowments investing purely for profit. For example; student communities are beginning to raise their voice 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 harmful industries.

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.

Smaller nonprofits are priced out and excluded from accessing complex structures that could benefit their ability to operate. We believe a low cost, easy setup, digital nonprofit endowment product is needed to help nonprofits become financially sustainable over the long term.

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.

What a programmable endowment product can do:

It allows nonprofits to raise capital, source & invest in assets that align with the vision and mission of the parent nonprofit, and receive returns that can be used for further investments, rainy day usage or cover general annual operational expenditures. We saw a tremendous increase in need as a result of the COVID-19 pandemic where traditional donation avenues declined, and many nonprofits were left financially exposed.

Angel Protocol has 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, preserving and growing wealth, to provide long-term sustainability.

Additionally, nonprofits can govern funds in new and creative ways including on-chain outcomes based cash flows, programming distributions based on criteria being met. In the last six months, Angel Protocol has attracted more than 160 nonprofits, and $ 6 M in TVL to test its product offering.

Angel Protocol is a web3 native protocol, reducing cost and time to launch, deploy and manage an 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. This is a huge step in democratizing venture capital and asset management by allowing people from diverse backgrounds to launch funds with minimal and zero costs. We believe these same benefits should be extended to providing technology infrastructure for those making the world a better place.

“Solo Capitalists will abound, requiring a business-in-a-box, an operating system for the new web3 active manager.”

Beyond Endowments

Very few cutting edge technological solutions exist within the impact sector and across impact stakeholders. We seek to change this. Angel Protocol has created Angel Impact Funds, a natural extension to our programmable endowment, a multi-purpose social impact fund that is versatile in nature. It allows changemakers to fundraise and create endowments, and impact financiers to coordinate and deploy capital.

Angel Protocol’s Angel Impact Fund is tailor-made for impact organizations across the impact investing spectrum, redefining global impact financing and accelerating the adoption of impact investing.

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This article was written by Sagar Tandon. Sagar is a Partner at Beyond Impact and an advisor to Angel Protocol as well as Venture Partner at Republic. He sits on several steering committees related to impact investing, gender lens, and alternative proteins, like 2xIgnite, GenderSmart Investing, Good Food Institute India and APAC. If you would like to read more of his thoughts, he publishes a monthly newsletter, “first followers” covering impact investing, venture capital, innovative financing instruments, web3, and venture building. 

References:

1: Endowment, Investopedia

2: Is endowment building a good nonprofit development strategy in developing countries?, Rick Cohen and Almudena OcejoHarvard’se Magazine

3: A generalized strategy of ‘mission hedging’: investing in ‘evil’ to do more good, Effective Altruism

4: The Moral Stain on Harvard’s Endowment, The Harvard Crimson

5: The Risk, Reward, and Asset Allocation of Nonprofit Endowment Funds, Andrew W. Lo, Egor Matveyev, and Stefan Zeume

6: The Anatomy of a Web3-Native Fund