The social investment farce moves into overdrive - several senior experts are now doubting that it’s even possible to make social investment models stack up at all.

Nick O’Donohoe from Big Society Capital even goes as far to admit that below £250k – where the vast majority of social enterprises want investment – it’s just not possible. This poses problems for Big Society Capital itself with its mandate to make returns from Social Investment Finance Intermediaries (SIFIs). As O’Donohoe explained to David Floyd - “for the SIFIs, they say if we don’t charge more than 10% that cannot possibly – in the absence of any grant support – be sustainable given the size of the loans.”

For BSC and the SIFIs to stack up financially, the cost of capital for frontline social enterprises has to be so high that almost no-one wants it. Or the deals so big that almost no-one can take it. It’s no wonder that social investment is coming under increasing fire. Rod Schwartz’s rather crafty solution is for social enterprise to take on this high cost of capital above the odds in order to keep social investors in business. When social enterprises are being to make a financial sacrifice in order to support social investors, we really are down the rabbit hole.

Here’s 8 constructive suggestions that might help get us out of this mess – all going back to basics with the question What’s so social about social investment anyway?

1. Social sometimes refers to the possibilities of digital technology – social media and social networks for instance. We know that digital lending and finance platforms are already challenging conventional institutional finance models. Zopa, Kiva and crowdfunding models which enable disintermediation – cutting out the middle man – can take costs out of the system by introducing investors more directly to investees. No wonder our models can’t stack up if there’s layers of intermediaries to maintain – let’s try new models which reconnect investors with investees.

2. Social sometimes refers to behaviour. Perhaps the greatest trick Mohammad Yunus ever pulled was in recognising that human behaviour drives credit-worthiness. Grameen’s model has been supported  through the formation of a groups of borrowers taking collective responsibility, and through peer pressure, which keeps defaults lower than they might otherwise be. Similarly, community-owned shops have an astonishingly low failure rate because of the incentives created when a shopper is also an owner. Let’s try harnessing these lessons and building them into our social investment models.

3. Social sometimes means mingling with each other. If our models won’t stack up then perhaps we need to unashamedly ask others to make it possible. Government, grant-makers, foundations and philanthropists may have good reasons to use their cash alongside more red-blooded investors, and on softer terms. Or is this just using philanthropy to prop up returns to the rich? Even if it is, perhaps it’s worth it? Rod Schwartz thinks so, suggesting that “Finding these pots and blending them into the mix to facilitate transactions is a key to social finance.” It seems the Big Lottery Fund is already taking on this role to some degree, which is good news for making social investment work but raises serious questions about the role and political independence of the Lottery.

4. Social sometimes means getting out and about. Perhaps costs can be reduced if intermediaries weren’t based in Central or West London? Maybe a few more could set up shop in the South or the East? Or, whisper it, even outside London? Is it a coincidence some of our most popular and more sustainable social investment intermediaries are based outside London? As well as reducing costs, the other advantage here is that investors would be closer to understanding their market - most social enterprises aren’t based in West London and don’t spend their time quaffing canapés at fabulous launch events. Ah, there’s another cost that could be stripped out of the system.

5. Social sometimes has something to do with fairness and closing the gap between winners and losers. Perhaps too many of our social investment models are based on a conventional venture capital model where the gains from one or two winners pay for eight or nine losers. But VC returns have averaged around zero since the dotcom crash and with such a high failure rate among VC invested companies, why on earth would we want to copy that model, without at least a few tweaks to the design? Can’t we develop models that seek more modest returns from one or two winners and fewer losers? Then everyone’s a winner.

6. Social sometimes refers to the social sector. At the moment, the social sector is losing money to the city at both ends. At one end, paying interest on around £4 billion of lending which NCVO have identified in their wonderful Almanac – but which is bizarrely ignored by the self-congratulatory £200m per annum “social investment market”. At the other end, non-property assets under management by financial services on behalf of the sector actually fell in value last year. If instead, the sector invested more in itself, it could both undercut the banks and still deliver returns on assets, keeping more money in the sector and building greater self-sufficiency. Let’s worry less about chasing mainstream institutional capital and adapting to their models when we could be developing our own models that work for us.

7. Social also refers to the social sector in terms of its model of not distributing profits. Everything else being equal, this means social sector investors have lower costs as they don’t have to keep hungry shareholders happy and can thus offer a cheaper cost of capital.  Even perennial social sector cynics, the Treasury agree, suggesting that “Building societies have a natural advantage to banks… as they have no implicit commercial responsibility to maximise dividends to shareholders”. So more models that are built on these principles can help us keep costs down.

8. Social is ultimately about people and putting people above structures and institutions. Let’s be frank, if you ask me if I'm up for putting a small amount of money or a small fraction of my pension into investments that may or may not make a return but can make the world a better place, then I’m up for it. Others too. Thousands of us. Just because conventional financial structures can’t cope with this less narrow view of the world, defined only in terms of maximising financial return, and can't imagine that I might sometimes accept a modest loss, then this doesn’t mean we can’t invent new ones. If we can channel those sentiments and create institutions and structures that reflect them, then we have more room to manoeuvre.

So social investment might have a chance if we pursue more technology enabled, behavioural-savvy models based around the UK which seek more modest returns, less frequent losses and which reflect our own social motivations and models. If we don’t build these models, then we’re going to pay the price.