What is the sugar daddy effect, according to Aswath Damodaran

Aswath Damodaran, a Professor of Finance at the Stern School of Business at New York University, famous for his philosophies on valuations has adapted the popular phrase ‘sugar daddy’ into the world of finance.

For the uninitiated, a sugar daddy is a rich, older man who showers young women with money and gifts for her company, friendship, love, and/or sex. The valuations Guru believes something similar is at play in the world of venture capital too.

In an article published on his LinkedIn account on October 29, Damodaran argues that even the largest of entities like sovereign wealth funds and venture funds backed by big corporations make less diverse bets due to a lack of independence from the parent or the government that provides the money.

“There are relatively few firms, where there is a corporate venture capital (CVC) arm or division, that is in charge of, and accountable for, CVC investments,” he added citing the example of Google, which benefited from betting outside its comfort zone in startups like Uber, Airbnb, and Slack early in the lifecycle of each startup. On the other hand, tech giant SAP had to shut down its venture arm this year.

CVCs accounted for over half of all venture investments in the world in 2023. According to the professor, they have punched well below their weight, collectively.

In fact, he adds that the idea for the article describing the self-imposed limitations of corporate venture capital came when Damodaran was exploring the struggle of big tech companies trying to enter new business despite ‘the capital and brainpower at their disposal’.

His argument is that it has particularly affected investments outside fossil fuels. A lot of money has gone into solar, wind and hydro energy and only a small slice has gone into nuclear energy and other low-emissions fuels because the impact investors ‘want to have their cake i.e. market-beating returns, and eat it too’. This directly impacts the efforts taken to battle climate change.

“In October 2024, had a collective market capitalization of $506 billion and they reported aggregated revenues of $117 billion in the most recent twelve months. In contrast, just one fossil fuel company, Exxon Mobil alone had a market capitalisation of $532 billion and revenues of $479 billion,” Damodaran said arguing for greater independence for the fund managers, clear and unconflicted purpose, and the willingness to pull the plug on the part of the parent.

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