Recently, Aswath Damodaran published a report criticizing how corporate venture capital (CVC), sovereign wealth funds (SWFs), and green investing frequently underperform due to their “assured funding,” which can reduce pressure to deliver efficient, innovative results – naming this dynamic The “Sugar Daddy (or Molasses Mommy) Effect”. We bring you an overview of the report, alongside insights on how this logic applies to the Croatian economy as a whole.
In his report, “The Sugar Daddy (or Molasses Mommy) Effect”, Aswath Damodaran critiques how corporate venture capital (CVC), sovereign wealth funds (SWFs), and green investing frequently underperform due to their “assured funding,” which can reduce pressure to deliver efficient, innovative results. Here’s a breakdown of affected sectors:
1. Corporate Venture Capital (CVC)
Large corporations invest in startups through CVC, aiming for either strategic or financial benefits. Damodaran suggests that CVCs act as a form of “real options,” especially in industries with high uncertainty, as they can spread bets across emerging technologies instead of relying solely on internal R&D or acquisitions. However, due to their structural ties to parent companies, most CVCs lack the independence and accountability of standalone venture funds. They are also more prone to prioritizing parent-company goals over profitable exits, which can lead to lower returns and prolonged support for underperforming ventures.
2. Sovereign Wealth Funds (SWFs)
In resource-rich nations, SWFs were established to invest national wealth, often from oil revenues, for long-term citizen benefit. They face unique pressures, with dual mandates to both generate returns and serve national interests. For instance, funds like Saudi Arabia’s Public Investment Fund support domestic economic diversification, while others may focus on bolstering specific sectors or investing in green energy. Damodaran highlights that SWFs tend to underperform financially compared to other active investments, largely due to political influences, lack of independence, and sometimes opaque operations. SWFs that operate with transparency and minimal government interference, such as Norway’s Norges Fund, tend to perform better.
3. Green Investing
Green investments aim to tackle climate change by supporting renewable energy initiatives. While driven by a clear mission, green investing has faced financial and social challenges, struggling to deliver competitive returns and meaningfully shift energy dependency away from fossil fuels. Damodaran points out that despite trillions of dollars invested, green companies struggle with profitability and a significant presence in the energy market. He notes that while some green investments are virtue-driven, aiming to reduce carbon footprints, many investors hope for above-market returns, creating a disconnect between environmental goals and financial performance. Furthermore, alternative approaches, such as improving fossil fuel efficiency, might have achieved greater reductions in emissions, highlighting limitations in green investing’s approach.
Common Pitfalls and Recommendations – Damodaran identifies common pitfalls, including the safety net of assured funding, mixed mission objectives, stakeholder pressures, and limited accountability, which together prevent optimal outcomes. In CVC, parent-company dependency stifles independent decision-making. For SWFs, government priorities often clash with financial goals, while in green investing, the pressure for both profitability and environmental impact hinders practical progress. To enhance these entities’ performance, Damodaran suggests:
Independence: Structuring CVCs and SWFs as separate, independent entities can improve focus and accountability, fostering genuine innovation. Transparency: Making operations transparent and ensuring clear reporting on both social and financial goals would help avoid inefficient practices. Clarified Missions: Separating financial and social missions within each entity could lead to more targeted and realistic strategies. Accountability: Regular evaluations based on each entity’s core objectives, with the option to scale back or cease funding for underperformers, would enhance adaptability and efficiency.
Overall, while Damodaran acknowledges the potential of these models but emphasizes the need for clear goals, efficient oversight, and adaptability. For each to reach its promise, stakeholders must balance social missions with financial realities, making adjustments to drive impactful, measurable results.
Croatia?
How might this be applied to our country and what can we learn from wise Damodaran? It’s hard not to notice the parallel with Croatia’s dependence on tourism revenue bearing resemblance to Damodaran’s “Sugar Daddy Effect”. Each year, tourism brings a significant influx of “free money,” but this dependence delays Croatia from diversifying its economy or new innovations in other sectors. With guaranteed returns during peak seasons, there is little urgency to develop alternatives or invest in longer-term economic stability. As a result, the economy risks vulnerability, lack the accountability (!!) and strategic independence. We are for sure country with a curse of natural resources. And the one that, yet, did not manage to be “above” that curse – maybe we need some internal R&D.
Nevertheless, the reality is that there is a high level of dependency and you can read more about our tourism in the recently published blog (here), as our peak season for this year is over. But don’t forget about that need for our internal R&D 🙂
