Aswath Damodaran: The Sugar Daddy Effect

In his latest article, NYU professor Aswath Damodaran explores the common challenges faced by three types of entities that have access to assured funding: corporate venture capital (CVC), sovereign wealth funds (SWF), and green energy investments.

In Aswath’s opinion, while CVCs, SWFs, and green energy investments have significant potential due to their access to capital, they often fall short because of a lack of urgency, mixed missions, insufficient accountability, and poor transparency.

Here are the key takeaways:

• Assured Funding and Lack of Accountability: All three entities benefit from assured funding—CVCs from parent companies, SWFs from governments, and green energy from impact investors. However, this financial security often leads to a lack of urgency and accountability. Without the fear of running out of capital, these entities may underperform compared to their more competitive counterparts, such as traditional venture capitalists or conventional energy companies.

• Mixed Missions Create Confusion: Each of these entities often has multiple, sometimes conflicting, objectives. For example, SWFs may be tasked with both maximizing returns and supporting national interests like economic development. This mixed mission complicates decision-making and can dilute focus on core goals, leading to inefficiencies.

• Underperformance and Lack of Pruning: Despite their size and resources, these entities tend to underperform in aggregate compared to their peers. One reason is the lack of “ruthlessness” in cutting off failing projects or companies. Unlike traditional venture capitalists who quickly exit underperforming investments, CVCs and SWFs tend to continue funding weak ventures for too long.

• Transparency Issues: Many CVCs and SWFs operate with limited transparency, making it difficult to assess their true performance. This opacity often shields inefficiencies and prevents effective accountability.

• Learning from Failures: Aswath emphasizes that failure should be seen as a strength if it leads to better decision-making in the future. Entities need clear contingencies for funding based on performance metrics, a focused core mission, and realistic expectations about the trade-offs between financial returns and social objectives.