UNIT IV VENTURE CAPITAL AND CREDIT RATING.pptx

Venture Capital meaning, Characteristics-
Stages, Institutions-Credit Rating System-
Growth Factors-Credit Rating Process-
Domestic and Global Crediting Agencies

VENTURE CAPITAL
 Meaning:
 Entrepreneurs need investments for their start-up
companies. The investments or the capital that these
entrepreneurs receive from wealthy investors is called
Venture Capital and the investors are called Venture
Capitalists.
 VC firms reduce the risk of investments by co-
investing with other VC firms. Usually, there will be
the main investor called the ‘lead investor’ and other
investors will be called ‘followers’.

VENTURE CAPITAL
 How does Venture Capital Fund work?
 Venture Capital Fund is made up of investments from wealthy
individuals or companies who give their money to a VC firm to
manage their investment portfolios for them and to invest in high-
risk start-ups in exchange for equity.
 The basic idea is to invest in a company’s balance sheet and
infrastructure.
 Venture Capitalist nurtures the idea of an entrepreneur for a short
period of time and exits with the help of an investment banker.
 In a start-up company, VC will receive an equity partnership in
exchange for investments in the start-up company.
 VC’s receive liquidation preference, it means in the worst-case
scenario where the company fails, VCs are given the first claim to
all the company’s assets and technology. It also offers voting
rights over key decisions like Initial Public Offer (IPO) or even
sale of the company.

Advantages of Venture Capital
Advantages of Venture Capital
Banks usually prefer to finance a new
business which has hard assets. In the current
information-based economy, new start-ups
hardly have any hard asset. Venture
Capitalists step in under these circumstances.
They can provide more insights into the
market.
Can help in strategy formulation.
Can help in developing strategic networks

These Are The Top Startup Investment Deals
That Got Vcs
 The total startup funding deals in India stood at $7.9
billion, according to a report by IVCA and E&Y.
 Paytm and OYO’s funding rounds were the top deals of
the year.
 SoftBank was the leading investor for most deals.
 The Indian startup ecosystem is the third largest in the
world, and that has been raking in investments.
According to a report by Indian Private Equity and
Venture Capital Association and Ernst & Young, the
total startup funding was at $7.9 billion, reaching a five
year high.

Indian hospitality unicorn OYO raised
$1.5 billion in a round led by SoftBank.
In the same round, founder Ritesh
Agarwal pumped in $700 million, as an
exercise to buy back shares in his own
company. OYO, which has been in the
news of late because of a multitude of
troubles, is one of SoftBank’s biggest
bets.

Paytm – $1 billion
 Vijay Shekhar Sharma led Paytm raised $1 billion in
funding, taking its valuation to $16 billion. The round was
led by T Rowe and SoftBank which invested $200 million
while Alibaba’s Ant Financial invested $400 million, along
with participation from Discovery Capital.
 “Today, we open the next chapter in Paytm’s journey of
India’s financial inclusion. We commit to invest an
additional ₹10,000 crore to serve financially unserved and
underserved,” wrote Sharma in a tweet announcing the
funding.


Udaan – $585 million
 Indian B2B e-commerce platform Udaan
raised $585 million from Tencent, Altimeter,
Footpath Ventures, Hillhouse, GGV Capital
and Citi Ventures in October 2019. With the
latest funding, Udaan’s valuation soared to
$2.8 billion taking its total funding to $870
million. It is also one of the fastest Indian
startups to reach unicorn status with a
valuation of $1 billion.

FirstCry – $400 million
 SoftBank invested $400 million into
FirstCry, a Pune-based babycare and
mothercare retailer. The investment was
made in tranches, with $150 million in the
first round. The funding will take FirstCry’s
valuation to $800 million, making it just
$200 million short of becoming a unicorn.

Delhivery – $395 million
 Logistics tech startup Delhivery finally joined the
unicorn club after raising $395 million from SoftBank.
The latest round of funding took Delhivery’s valuation
to $1.6 billion. Other investors in the round included
the US-based private equity firm Carlyle Group and
Chinese conglomerate Fosun International. Delhivery
also has Tiger Global, Nexus Venture Partners and
Times Internet as its investors.

CRED – $245 million
 Freecharge founder Kunal Shah’s second
innings is with the credit startup CRED. The
year-old startup is already rumoured to be
in the soonicorn list. It raised funds twice in
2019 alone – $125 million series A round and
$120 million series B funding from Sequoia,
Ribbit Capital and more.

Pharmeasy – $220 million
 Online pharmacy startup Pharmeasy raised $220
million in a round that was led by Temasek. The round
also saw participation from Canada-based pension
fund CDPQ, asset management group LGT, KB
Financial Group and existing investors like Bessemer
Venture Partners, Nandan Nilekani among others.
Temasek valued the startup at $700 million after the
funding.

Grofers – $200 million
Grocery retail startup Grofers raised over $200 million
from Softbank Vision Fund in May, 2019. With this
funding, its reported valuation is set to be almost $1
billion – just a few steps away from being a unicorn. The
series F round also saw participation from new investor,
KTB, and along with existing investors – Tiger Global
Management and Sequoia Capital.

Branch International – $170 million

Grofers – $200 million
The San Francisco-based financial
services company Branch raised
$170 million in April 2019, right
before its India expansion. It raised
funding from B Capital,
Foundation

Hero Future Energies – $150 million

Hero Future Energies – $150 million
 In November 2019, Hero Future Energies raised $150
million from Masdar (Abu Dhabi Future Energy Co).
The company was established under the Hero Group
in 2012.“The strategic investment of $150 million by
Masdar will help facilitate the further expansion of
HFE in India and other key growth markets," Hero
Future Energies had said in a statement then.

Bounce – $150 million
 The Bengaluru-based two-wheeler rental platform
Wickedride, which owns Bounce, raised funding from
Sequoia Capital and Accel Partners. Bounce has gained
a massive following in Bengaluru and has reportedly
raised another Series D round of funding in January,
2020. The startup was founded in 2014 by Vivekanand
Hallekere, Varun Agni and Anil G.

SoftBank
 SoftBank Group Corp. is a Japanese multinational
conglomerate holding company headquartered in Minato,
Tokyo. SoftBank owns stakes in many technology, energy,
and financial companies. It also runs Vision Fund, the
world's largest technology-focused venture capital fund,
with over $100 billion in capital.
 The company is known for its leadership by founder
Masayoshi Son.It operates in broadband, fixed-line
telecommunications, e-commerce, internet, technology
services, finance, media and marketing, semiconductor
design, and other areas.
 SoftBank was ranked in the Forbes Global 2000 list as the
36th largest public company in the world, and the second
largest publicly traded company in Japan after Toyota.

SoftBank
 On April 1, 2020, Sprint completed the merger with T-Mobile US,
which was majority-owned by Deutsche Telekom, making T-Mobile
the parent company of Sprint until the Sprint brand is phased out on
August 2, 2020. The merger also led to Softbank holding 24% of the
new T-Mobile's shares, while 43% of shares are held by its parent
company, Deutsche Telekom. The remaining 33% will be held by public
shareholders. In May 2020, Alibaba's co-founder and former CEO Jack
Ma resigned from the board of SoftBank.
 In July 2020, SoftBank announced that is considering to sell or IPO
British chip designer Arm Holdings. In September 2020, it was
reported that the company will be selling Arm Holdings to American
technology company Nvidia for $40 billion.For Q2 of 2020, the
company grossed a revenue of $12 billion. The firm also announced that
it will be arranging a new fund worth $555 million. The fund will be
used to invest in various companies including Amazon, Apple and
Facebook.
 In September 2020, SoftBank Vision Fund 2 leads $100 million Series C
in Biofourmis.Also in September 2020, Softbank was identified as
being the Nasdaq whale where it bought stock options valued at
Billions, betting on higher prices for the biggest technology companies.
That month SoftBank also sold Brightstar Corp to Brightstar Capital
Partners.
 .

SoftBank
 American technology company Nvidia announced plans on 13
September 2020 to acquire ARM from SoftBank, pending
regulatory approval, for a value of US $40 billion in stock and
cash, which would be the largest semiconductor acquisition to
date. SoftBank Group is to retain a 10% share in the company
while ARM maintains its headquarters in Cambridge. In
September 2020, SoftBank sold Brightstar Corporation to the
Brightstar Capital Partners for an undisclosed amount.
 In December 2020, Hyundai Motor Group acquired an 80% stake
of Boston Dynamics from SoftBank for approximately $880
million dollars. SoftBank retains about 20% through an affiliate.[
 In January 2021, SoftBank sold $2 billion in Uber Technologies
shares through affiliate firm SB Cayman.
 In march 2021, SoftBank racked up roughly $33billion gain on
paper through the public market debut of south Korea's largest
e-commerce company Coupang.

METHOD OF FINANCDING BY VENTURE
CAPITAL INSTITUTIONS
 METHOD OF FINANCDING BY
VENTURE CAPITAL INSTITUTIONS
 Before going in for venture capital finance,
the venture capital institution will have to
assess the potentiality of the borrowing concern
by a proper appraisal. This appraisal will be
similar to the project appraisal undertaken by
commercial banks. There are three stages
involved in the capital finance.

Early Stage Financing
 Early Stage Financing
 The venture capital institution provides seed
capital at the early stage of the borrowing concern.
 Seed Capital: - In seed capital, the funds are provided
for testing the product and examining the commercial
viability of the product. It enables the venture capital
institution to find out the technical skill of the
borrowing concern and its market potentiality. So, we
can say seed capital is more of a product development
and all the finance required at this stage is provided by
the venture capital institution.

Start up
 Start up: - Once the product is tested in the market and after being
satisfied with its acceptability by the market, financing will be
provided for further development of the product and marketing of the
product.
 The start up may be classified into four categories.
1. A new high technology , introduced by the entrepreneur
2. A new business started by an entrepreneur who has a thorough
working knowledge and experience – normally started by persons
who were working in an established firm and having gained
sufficient experience.
3. New projects started by existing company Hindustan Lever Limited
 Example: Retail business started by Hindustan Lever Limited
4. A new company promoted by existing company –Reliance
Industries Ltd. Started Reliance Jio Infocomm Limited (RJIL), a
subsidiary of Reliance Industries Limited (RIL)

 Second round finance:- The borrowing concern has
successfully launched the product in the market which
is evident from its acceptability. However, the
business has not become commercially successful for
want of some more finance. It is at this stage, the
venture capital institution provides more funds than at
the initial stage.
 Later stage financing
 The business concern which has borrowed
venture capital has now become a well established
business. But still it is not able to go in for public
issue of shares. At this stage, the venture capital
institution will provide finance.

 Later stage financing
a)Mezzanine capital:- This is a stage where the
borrowing company is not only well established but has overcome the
risks and has started earning profits. But they have to go for some more
years reaching the stage of self sustenance. This finance issued by the
borrowing company for purchase of plant and machinery, repayment of
past debts, and entering new areas.
Example of Mezzanine Financing
For example, Bank XYZ provides Company ABC, a maker of
surgical devices, with Rs.2 crore million in mezzanine financing.
The funding replaced a higher interest Rs. 2 crore credit line with
more favourable terms.
b)Bridge capital:- This is a medium terms finance ranging
from one to three years and used for growth of the business.
Bridge financing can take the form of debt or equity and can be used
during an IPO. Bridge loans are typically short-term in nature and
involve high interest. Example: Extending bridge loan for acquiring
other firms.

 Management Buy-outs (MBO):- Here, we deals about the
nature of management that is likely to exist in the borrowing
concern. In the case of management buy- outs, venture capital
is used for removing the external control on the management,
by acquiring all the shares and the voting rights. A management
buyout (MBO) is a transaction where a company’s
management team purchases the assets and operations of the
business they manage. A management buyout is appealing to
professional managers because of the greater potential rewards
and control from being owners of the business rather than
employees.
 Example: An Indian company’s shares may be purchased
by NRIs at the initial stage and after sometime these shares are
bought back by the company employees with the help of profits
and finance by venture capital institutions.

 Management Buy – in (MBI):- In the case of
buy-in, funds are provided for an outside group
to buy an ongoing company. But this is not
popular as it requires a ready management, an
investor and a company to take over the
existing one. A management buy-in (MBI) is a
corporate action in which an outside manager
or management team purchases a controlling
ownership stake in an outside company and
replaces its existing management team. This
type of action can occur when a company
appears to be undervalued, poorly managed, or
requires succession.

Turn Around
 A sick company may be taken over by providing
two important inputs of capital and management.
 Financial Turnaround: - When the company is
able to improve its conditions financially, it is called
financial turnaround, which is due to the financial
assistance by venture capital institution.
 Management Turn around: - Similarly, when
the management of the company makes a turn around
by becoming self dependent and is able to face the
challenges of business, it is called management turn
around.

Important of Venture Capital Financing
 Important of Venture Capital Financing
1. Promoting Entrepreneurs
2. Promoting products
3. Encouraging customers
4. Bringing out latent talent
5. Promotion of exports
6. Catalyst
7. More employment opportunities
8. Financial viability
9. Technological growth
10.Sick companies
11.Development of Backward areas


Credit Rating
 Definition of 'Credit Rating'
Definition: Credit rating is an analysis of the
credit risks associated with a financial instrument
or a financial entity. It is a rating given to a
particular entity based on the credentials and the
extent to which the financial statements of the
entity are sound, in terms of borrowing and
lending that has been done in the past.

 Description: Usually, is in the form of a
detailed report based on the financial history of
borrowing or lending and credit worthiness of
the entity or the person obtained from the
statements of its assets and liabilities with an
aim to determine their ability to meet the debt
obligations. It helps in assessment of the
solvency of the particular entity. These ratings
based on detailed analysis are published by
various credit rating agencies like Standard &
Poor's, Moody's Investors Service, and ICRA,
to name a few.

The Credit Rating Information
Services of India Limited (CRISIL)
initiated the concept of credit rating
in India. CRISIL was established in
1987 and started operations in
January 1998.

Who Evaluates Credit Ratings?
 A credit agency evaluates the credit rating of a debtor by
analyzing the qualitative and quantitative attributes of the
entity in question. The information may be sourced from
internal information provided by the entity, such as
audited financial statements, annual reports, as well as
external information such as analyst reports, published
news articles, overall industry analysis, and projections.
 A credit agency is not involved in the transaction of the
deal and, therefore, is deemed to provide an independent
and impartial opinion of the credit risk carried by a
particular entity seeking to raise money through loans or
bond issuance.
 Presently, there are three prominent credit agencies that
control 85% of the overall ratings market:

Credit Score
 A credit rating is used to determine an entity’s
creditworthiness, wherein an entity could be an
individual, a business, a corporation or a sovereign
country. In case of a loan, the rating is used to
establish whether a loan should be rendered in the
first place. If the process goes further, it helps in
deciding the term of the loan such as dates of
repayment, interest rate, etc.
 In the case of bond issuance, the credit rating
indicates the worthiness of the corporation or
sovereign country’s ability to repay the bond
payments in due time. It helps the investor
evaluate whether to invest in the bond or not.

Credit Rating by Indian Agencies- Credit Score

Credit Rating by International Agencies -
Credit Score

Users of Credit Ratings
 Credit ratings are used by investors, intermediaries such as
investment banks, issuers of debt, and businesses and corporations.
• Both institutional and individual investors use credit ratings to
assess the risk related to investing in a specific issuance, ideally in
the context of their entire portfolio.
• Intermediaries such as investment bankers utilize credit ratings to
evaluate credit risk and further derive pricing of debt issues.
• Debt issuers such as corporations, governments, municipalities,
etc., use credit ratings as an independent evaluation of their
creditworthiness and credit risk associated with their debt issuance.
The ratings can, to some extent, provide prospective investors with
an idea of the quality of the instrument and what kind of interest
rate they should be expecting from it.
• Businesses and corporations that are looking to evaluate the risk
involved with a certain counterparty transaction also use credit
ratings. They can help entities that are looking to participate in
partnerships or ventures with other businesses evaluate the viability
of the proposition.


BENEFITS OF CREDIT INSTRUMENTS

Benefit from the point of view of investors:
The investors can choose their investments on the basis of
credit rating.
As the credit rating is done by professionals, the investors can
rely on the credit rating.
It gives scope for the investors to forecast about the future of
their investments.
A comparative study between different credit instruments
enables the investors to choose their investments.
Even unknown securities could be purchased based on credit
rating. It also enables the investors to go for a diversified
investment


Benefit from the point of view of investors:
As there is a periodical review of the companies by
credit rating agencies, the investors have the
opportunity of swapping their weaker investment with
a stronger investment, based on the credit rating.
The investors can minimize their existing loss by
choosing effective future investment. Thus, it act as
hedge for the investors.
Liquidity, safety and profitability are duly considered
through credit rating mechanism by investors.


Benefit from the point of view companies:
Companies will be able to raise funds from the market
as their debt instrument are backed by credit rating.
Credit rating acts as a motivation for companies to
either improve their position or maintain their existing
position, if they are in higher level of credit rating.
When companies of equal standing are issuing their
credit instruments, better placed companies are
identified with a positive signal on the credit rating such
as A+.


Benefit from the point of view companies:
In the market, companies with a higher rating will
be in a position to provide better liquidity for their
credit instruments.
When companies are raising funds in the overseas
market, credit rating enables them to mobilize
more funds.
Credit rating will provide better security form the
lenders’ point of view. This will enable the
companies to sell their credit instruments easily.

 Benefit from the point of view of regulating authorities:
 The regulatory authorities such as SEBI and RBI can discipline
financial institutions by insisting on credit rating before going for public
issue.
 By imposing various conditions in credit rating, the financial soundness
of the companies is maintained.
 Any down-grading of credit rating will send clear signals to the
regulating authorities to closely monitor the functioning if the company
concerned
 The general economic condition in the country could also be analysed
by the regulating authorities form the credit rating of various companies.
 Credit rating also provides authority, responsibility and accountability to
the regulating authorities.

Benefit from the point of view of public:
Any unknown company or infant company cannot try to cheat the
public by offering an unusually higher rate of interest, as without
credit rating, the reliability of the company will be in questing.
Proper credit rating also channelizes the savings of the public to
productive purposes and prevents unwanted conspicuous
consumption, such as investing in gold.
Public can also discriminate their investments and go in for better
credit instruments on the basis of credit rating.
Off –shore savings can be attracted through credit rating. Indians
settled abroad can choose investment in domestic companies based
on credit rating.
Legal action could be taken when credit rating companies fail to
fulfill their obligations. This will instill confidence in the minds of
the investors.

Credit rating of individuals, companies and countries
a)Companies
b) Individuals
c) Countries
 a) Rating of Individuals:- Individuals go for credit rating when they want
to borrow form recognized institutions. In India, we have Onida Individuals
Credit. Rating Agency (ONICRA)which gives credit rating for individuals.
 b) Rating of Companies: - As per the guidelines of SEBI and RBI,
companies have to resort to credit rating when they.
 (i) Accept public deposit
 (ii) Issue credit instruments in domestic market
 (iii) Issue credit instruments in overseas market
 c) Rating of Countries: - Credit rating is resorted to be countries for
borrowing in international market or for attracting foreign investments or
for raising funds from the international institutions like IMF and IBRD.
Standard and poor is a leading international credit rating agency.

Types of credit rating
We have seen the various rating symbols for different categories
of debt instruments. We can also classify credit rating as types of
credit rating which are based on different securities. These are.
1. Equity rating
2. Bond rating
3. Promissory note rating
4. Commerical paper rating
5. Soverign rating
The above ratings will help both the investor and credit agencies
in dealing with the instruments while accepting them as securities
for advancing any type of loan . Let us study about them briefly.

1. Equity rating
 When different companies are issuing shares,
equity rating will enable the investor to choose proper
equity share on the basis of the credit rating. While
judging the equity rating, the past performance of the
company, the earning per share and the turn-over of the
company will be taken into account.
 If a loss making company turns into a profit
making one, after wiping off its losses, its equity rating
will go up.
 At the same time , if there is a decline in the
dividend rate of an existing concern, compared to its
previous year, its rating will get a beating.

2.Bond rating
Bonds are issued both by Government as well as by
private sector companies. In the international market, rating
of bonds will depend on the rate of interest offered and the
value of the currency it represents. If the bond is issued in
terms of U.S. Dollar or Pound Sterling, its value will be high
and the rating will naturally be on the positive side. But the
bonds of underdeveloped countries will have lesser credit
rating due to high fluctuations in their currency value.
Bonds are also issued in the domestic market by both
State and Central government. Even the local government,
such as Corporations and Boards also issue bonds for raising
long-term finance. In India government bonds are preferred
to private bonds as there is a guarantee for repayment of the
principal and interest amount.

3.Promissory note rating
 In order to raise short- term loans,
promissory notes are issued by different commercial
companies and depending upon their resources, these
promissory notes will have credit rating. But, the issue
of promissory notes will have no backing and the
person advancing the resources against the promissory
notes will undertake greater risks. Depending upon
the credit rating, ranging from P1 to P6, promissory
noted are preferred as a short-dated instrument. The
unutilized resources lying with commercial banks may
be invested in promissory notes of a better credit
rating so that within a short period, a reasonable
‘return’ can be obtained on idle funds.

4.Commerical papers
 These are instruments issued by leading non-
banking financial companies which can be obtained by
companies for raising short-term loans form commercial
banks. On due date, commercial banks will present these
papers to the NBFC which has issued the commercial
paper and funds will be obtained along with interest. Later
on, the NBFC will collect the amount form the company
which has utilized its commercial paper for raising its
short-term loans.
 In order to enable the commercial banks to
discount commercial papers, credit rating is provided to
the commercial papers which depends upon the standing
of the non banking financial company(NBFC) which is
issuing the commercial papers. In India NBFCs like
Sundaram Finance may issue the commercial papers
which may be credit-rated by a credit rating agency.

Defects of credit rating in India
 Defects of credit rating in India
1. No uniformity among rating companies: An average investor
in India is not able to understand the different credit ratings
prevailing in India as there is no uniformity among the credit
rating agencies, especially among CRISIL, CARE and ICRA.
2. No standardization in rating: there is no standardization of
credit rating for the same instruments. For fixed deposits, there
are 6 different grades and for promissory notes, there are 5
grades.
3. No standardized fee structure: The credit rating agencies do not
have uniform charging rates and as a result, they create anamoly
among the borrowing concerns.
4. No proper Distinction: Distinction between equity instruments
and mutual funds is not provided.

Defects of credit rating in India
 Defects of credit rating in India
5.Making rating mandatory for equity instruments and Mutual funds:
Rating exercises should be made compulsory to equity instruments and
mutual funds. In India, we have large number of private sector mutual
funds and the investors must know the details of mutual funds, having
either positive or negative features.
6.Difference between two credit rating agencies: In India, there is no
remedy for difference in the credit rating agencies. One may give the
rating of ‘safety’ and another may give ‘risky’. In such as case, what is the
remedy open to the public? In foreign countries, in similar situations,
credit rating from a third credit rating agency becomes mandatory.
7.Lack of reliability of Credit rating: Even credit-rated companies have
failed in India and there is no remedy is no remedy for this. Example CRB
Capital Markets which had a turnover of Rs.1,000 crores per year and
with a credit rating of ‘A’, failed , and neither SEBI nor RBI could come to
the rescue of investors. The credit rating agency in India lacks
transparency.

UNIT IV VENTURE CAPITAL AND CREDIT RATING.pptx

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