Listen to the rhetoric in the social capital space, and you’ll hear lots of talk about “patient” capital and “concessional” rates for social entrepreneurs who can deliver impact. It would lead you to believe that social capital is available on much better terms than commercial capital. But you’ll also hear many investors complaining that there are very few social entrepreneurs ready for investment.

One of the key reasons there so few investable opportunities is that smart entrepreneurs quickly realize that the rhetoric about social capital is just that. In reality, social capital is usually significantly more expensive than commercial capital.

That doesn’t mean that rates on debt or terms on equity are nominally higher than commercial capital (though some social investors seem to take an odd pride in demanding the same terms as venture capitalists for social investments). It means that the real cost of social capital, when you take into account the amount of effort and time the average entrepreneur has to put in to find and meet the demands of social investors, is much higher than it would be with commercial investors.

Some of the stories I’ve heard in just the last few months illustrate the (unfortunately common) problem.

One developing-world social enterprise dealt with a group of social investors who literally attempted to collude in front of the management team to drive down the valuation. In the midst of a conversation with several investors that was intended to finalize details of an early-stage investment, the management team shared that one angel investor’s funds were tied up in international capital controls. One of the investors—a prominent one on the social capital circuit—suggested to other potential investors that they should take advantage of the cash crunch the firm was experiencing and hold their commitments for a few weeks to force a better valuation. So much for a double bottom line.

In another case, an entrepreneur found that the concessional social capital the investor offered was more expensive than the terms from a pure venture capitalist on every level: nominal valuation, governance, control, and reporting. The social investors became enraged when their term sheet was rejected and promised to do all they could to shut the entrepreneur out of social capital meetings in the future.

Another social enterprise, focused on job creation for unskilled women, told me that after agreeing on financial terms with a prospective investor, they spent six months in weekly phone calls with the investor, going over theories of change, social impact measurement metrics, and log frames. Once these were finally agreed on, the investor announced they had decided to focus on a different sector and backed out of the deal.

Raising commercial capital is no picnic, of course. You can find similar horror stories of bad behavior quite easily. But if you talk to people who have attempted to raise commercial and social capital at different points in their career, they will routinely tell you that raising social capital takes two to four times as much time and effort as raising commercial capital. Entrepreneurs can quantify that time and effort as opportunity cost, and it is part of the real cost of supposedly concessionary social capital.

The true cost of social capital puts social entrepreneurs in a catch-22. The capital that supposedly shares their goal of a double bottom line is so expensive that any personal return on their sweat equity (and cash) is unlikely—unless they start sacrificing social goals. Any entrepreneur capable of building the kind of investable social enterprise that social investors are looking for is smart enough to do the math, and many would rather drop out of the social capital market rather than penalize themselves by adopting the social moniker.

Social investors won’t find a wealth of investable companies, then, until they are willing to lower the real cost of social capital—in other words, make it truly social. That can take any number of forms, including lowering their expectations of return or simply cutting some of the steps and effort that go into the due diligence process. But perhaps the best thing they can do to lower costs is to fully invest in the development of a better functioning social capital market by dropping unique measures and requirements. Some progress is being made on this front (through tools such as the Global Impact Investing Rating System), but we’re a long way from bringing the real cost of social capital in line with commercial capital.

Read more stories by Timothy Ogden.

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