User:Theo10011/Financial strategy

WMF has lacked a consistent long term financial vision. There has been no roadmap or concrete plan to reach a level of financial independence where we are fully self-sufficient. Even basic financial planning practiced daily as individuals, wasn't reflected in our financial vision. The extent of financial foresight was limited to keeping a small amount of reserves and limiting planned expenses - in terms of planned hirings and projects, things were delayed intentionally, at times, so as to have an impression of inflated surplus.

Past strategy

CFO changes and a lack of financial planning initiatives from the board and executive, limited our past strategy to just a single annual fundraiser online - at the same time, for roughly the same duration, using the same "Jimmy appeal" strategy. The situation for the past 6 years or so, where we ask for small donations from a large number of donors. The majority of our donations averages out at $15, with some movement within this particular range, year on year. The strategy thus, appears to be to crowdsource a large number of donations globally, with a rolling target across countries.

The primary platform for this fundraising is through banners on top of every page. Our primary appeal used to be based on Jimmy asking for small donations on banners, though some variation are constantly tried, to use other stories/narratives. Attempts have been made to use open letters, documentary, quotes, pictures - generally narratives built around cases in developing countries, where Wikipedia makes a big impact, asking donors to continue those efforts. It's an extremely common strategy tried among non-profits to make an emotionally manipulative ask.

The fundraising team experiments a lot to maximize clickthrough and donation rates, overlooking certain obvious implications. Their primary goal has been maximizing donations without realizing the cost of projecting these false, misleading narratives. From the emotional manipulative messages to stoking fears of wikipedia going offline - we have been set on a slippery slope of deception. We have ads on Wikipedia in terms of banners, the only difference is we are the only advertisers. Ironically, our own advertising banners are getting so misleading that allowing traditional advertisers might be more honest. Keeping Wikipedia ad-free is certainly something we all agree and want but the cost of doing that is getting too large and comes with its own set of baggage and dishonesty - a proper balance is needed where we are less dishonest in our campaigns. The fundraising team focus is solely on A-B testing, if there is one overused meme among wikiverse, it has become A-B testing - A/B test for everything - using it all to crunch data, run analytics to get the maximum yield in donations while pushing the narrative further and further from reality. We need to step back and take a look at what we want and how we are going about it.

There is no larger strategy in place beyond the annual banner based fundraiser. All eggs in one basket, year after year. No long term investments, no recurring income, no growth plan, no long term vision, no aim to balance budget, no financial contingency or diversification, along with a limited set of reserves. The majority of "investments" are derived from current assets which are accrued from Net assets which is primarily made of around $50 million in past donations - basically a cash reserve from previous donations of $50 million - that is all. Given the current expenses, such an amount would last an year or more, before being completely depleted. There is clearly a lack of cohesive long term strategy to invest or use those funds wisely.

Risks

Dependence on a single fundraiser - The entire foundation budget and the movement itself, is solely dependent on a single banner based fundraising campaign. Online campaigns are exposed to a multitude of risks in themselves.
- Macro-economic condition are a primary factor, a global or a national recession tends to directly affect donations.
- Prioritization - Donation pool is prioritized between charities seen as providing essential outreach while certain others fall lower. For example, a charity providing food for homeless, or medical supplies in war zone tend to get prioritized higher than a charity providing open source educational resources like Wikipedia.
- Law of diminishing returns - Once a maximum amount of yield has been achieved, annual returns from any fundraiser will plateau. If the law holds true, the donations will start to fall eventually after maximizing at one point. How far we are from a top is matter of debate.
- Slippery slope of changing narratives - the fundraising team in order to maximize the donations uses emotional messaging in their narrative that goes further and further away from reality. The annual budget is uses the "keep wikipedia online" ask - that the majority of the funds are essential to keep wikipedia online - this is simply not the case. Only a small amount of revenue goes to core operations that keep the servers and bare bone administration staff on pay - 80% of the budget does not go towards the essentials.
- No-ad argument - with longer more aggressive fundraising campaigns, we are moving away from our decision to stay ad-free with every step. The fundraising banners certainly qualify as advertisement, the only difference is we are the only advertisers so far. The banners have gotten more obnoxious and more emotionally manipulative than certain straight-forward ad campaigns, at some point we might have to ask ourselves, are we might be doing more damage and being more dishonest by our own fundraising campaigns.
Asset diversification - The investments are basically cash reserves, that will only fund the current expenses for one, maybe two years. These funds are probably held in some type of liquid form to be available on short notice. There is however, not a lot left to leverage in terms of future debt raising, if need be. There are little to no fixed assets to use if debt is needed for short term. There also appears to be no viable performing asset that generates an annual income - interest (too low), rent, profits, dividends.
Rainy day - There is no strategy to cope with a recession or falling macro economic factors. The reserves built up are too small to last beyond an year or so. Certain periods of economic uncertainty, short term crisis, or natural disasters, all can lead to WMF falling on harsh times and abandoning its mission mid-way.
Long term goal - There has to be an end goal - financial sustainability for example. There is a lack of a cohesive vision about what WMF wants to be in the long term, if it wants to be independent, financially sustainable on its own, a long term strategy has to reflect that. This doesn't imply moving away from an annual fundraiser, just more diversification and planning.

New Proposed Financial Strategy

In order to achieve financial independence and sustainability, WMF has to consider its long term growth and short term needs. Long term vision should focus on period of 10 years and beyond, while short term vision should be based around an yearly perspective.

We can look at a mix of the two. A long term decade oriented outlook tempered with our annual project based expenses. The annual expenses should be looked on as variables, subject to change, that would then dictate our plans for the coming year. The decade long target for self-sufficiency should focus on increasing endowment and maximizing yield at a constant rate. The endowment should provide for the "core expenses" of the foundation in the short term, and eventually take on the annual expenses as well. The core and non-core has to be differentiated and then, prioritized.

Long term Vision

An endowment perfectly addresses the need of most non profits, as well WMF in the current context. An endowment, or a fund, would be able to generate enough yield through its investments and financial management, to cover foundation expenses annually, forever. The goal there is not achievable in any short term, an educated guess would put such a target at 10 years or more to generate enough returns to cover entire expenses of the foundation.

There can be no set targets for the endowment, its discouraged to limit endowment donations. So, an endowment should remain open in perpetuity, raising donations for as long as possible with no set target or end date.

To accomplish this, certain basic principles need to be agreed upon for future fundraising.

First strategic decision that needs to be set in force, is to direct any and all donations above a certain threshold, $500,000 for example to go directly to the endowment. Donations over half a million to a million should not go to the annual budget, but to the endowment. This has the added benefit of making us isolated from the influence of large donors.
Second, those large donations have to be solicited pro-actively. A major gift team directly under a capable CFO, should focus efforts nationally and internationally to build relationships with non-profits, tech companies, governmental agencies. There are initiatives by governments, companies, institutions regularly that we are already aligned for. There contributions could be directed to the endowment, so they can live on in perpetuity instead of paying our annual bill. It would make an impact that can outlast any direct contribution, something the benefactors might like.
Annual budget should have a certain contribution built in to go towards endowment. This can be 10%-20% of the funds raised, directed every year to go to the endowment. This has to be a sustained contribution every year for the near future.

Endowment management is a complicated process. The endowment would have to account for a lot of variables and future growth, for example, cost of living adjustment, inflation and future plans. An annual growth rate would have to be built in to the endowment, usually through a projected surplus over the annual expenses that could be re-invested back. A team of financial managers and experts would be needed to regularly monitor and manage the endowment fund. Future targets, growth rates, risks, etc. would all have to be verified regularly by the board and the executives. It would have to be a closely monitored process together.

A diversified short term strategy

Short term strategy should basically be aimed at not "topping out", maximizing our fundraising capabilities from a single source. Restraint over our own abilities, is something that needs to be practiced. This can be in the form of lowered revenue targets, shorter fundraising donations, clearer narratives.

The basic perspective needed here is to exercise restraint and look at our annual targets as variables. A tentative target, if achieved would define how aggressive our spending could be on our projects. Certain projects could be de-emphasized temporarily. The community, donors and the readers can join in and collaboratively decide which projects deserve how much donations. This can be achieved through project specific donation drives or partial restricted fundraising. For example, saying we want to raise $10 million to fund our next WYSIWYG rich text initiative, here is a prototype and projected cost - would simplify our message and make it more honest. If donors agree they can fund it, if we fall short, we can prioritize and plan accordingly. It's one of many ways of looking at how our fundraising can be project specific.

Expenses need to be controlled. The targeted growth and planned projects for the past few years have had a disappointing result, the return on investment has been substantially lower than expected, yet we carry on the same revenue target after these disappointing results and expenses. Ideally, they should be realigned based on future support for the past projects, if abandoned, the resources need to be refactored.

Diversification, of our fundraising strategy in the short term can also have a positive effect on our long term growth. Things like matching donations, tax incentives offered by several governments around the world can be used to maximize our yield. We should find alternative fundraising methods, reliance on a single mode is quite risky.

Relevant points about Endowment

Copied from previous comments on Lila's page

An annualized yield of 2-3% which wouldn't sustain and wouldn't require much diversification beyond treasury bonds and other debt instruments. I believe your target yield is far too low, especially when you take in to account - inflation and natural capacity expansion (keeping pace with the technical evolution, projected salary growth and expenses). You'd be out of budget in 10 years or less. I'm sure you know Endowment management/investment is a very complicated and a risk averse practice but large university like Harvard and Yale consistently outperform the S&P 500 - Yale generates a yield of about 16% and Harvard about 15% (between 1985 and 2008). Of course, economies of scale and their social connection are a big factor but diversification is equally important. I believe you should start out aiming for a 5% yield, ideally from fixed income sources first. I agree 100M won't sustain and thus the endowment should remain open in perpetuity without a set target, you can set an ongoing target of 10-20% commitment from annual revenues for the near foreseen future. That should put the annual yield at the minimum of 5 million.
A 5 million annual yield, in my opinion should/could cover the absolute bare bone basic operational costs (hosting and admin). I'm speaking about this mostly from seeing the budget at 8 million once upon a time, and still operating at current technical levels with no large increase in bandwidth and traffic cost. 5 M could be the new benchmark to aim for to cut costs in core areas (admin expenses seem high in the budget).
Endowment can have gifts in kind too, I mean between the tax deductibility status, the healthy relation with large tech companies, not to mention a favorable public opinion - WMF can structure deals to receive support in kind from other organization and government entities. Things like hardware, hosting costs, bandwidth expenses or certain services could be procured on a long standing relation between benefactors.
There is no doubt that there is still an enormous amount of bloat in the budget. You know that so many departments were created, abandoned, and folded over the years with changing priorities - global development comes to mind, grants were also prioritized higher than it is now, not to mention a lot of C-level hires, product management grouping and the high number of contractors, most are unlisted (remote or otherwise). Personally, I think you've been given these positions and people and you are doing your best to use them the most efficiently you can but you are overlooking the central need for having them. Priorities, goals, even management style kept changing but instead of resetting and starting over, we are carrying over all the baggage from abandoned iterations that brought us here. I believe you and the HR should sit down re-evaluate the staff needs and envision things from a new perspective - I really think you can do a lot better job than your predecessors when you start from scratch and ask what we need instead of where can we fit this piece in to the puzzle.
The 40-45 million annual budget was the sweet spot to aim for in my opinion, looking at all the audit reports and the budget and the plan over the years. It is quite achievable and sustainable in my opinion to undertake all those developments, expand and still stay at that level indefinitely.
Litigation was a fear I heard a lot whenever a suggested endowment during my time. US is prone to a litigious atmosphere, and we are a constant target of bias. It was constantly suggested that having an endowment might make us a target for litigation or costly law suits with punitive damages, especially for us non-us residents this seemed like a fear. I really hope you plan for contingencies and have insurance and a protected legal status, to offer as much protection as you can to the endowment.