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The Rise of Papercorns: Understanding this Unique Type of Startup



In recent years, a new term has emerged in startup circles - the "papercorn". This refers to a private startup company that has achieved a valuation of over $1 billion on paper through private funding rounds, but has yet to have an exit event via an IPO or acquisition. Papercorns are essentially the unicorns of the private markets. While they appear immensely valuable on paper, their actual realized value is still unknown.


Papercorns have become more common in recent years for several reasons:


  • Abundance of capital - There has been an abundance of private capital flooding into tech startups from VC firms, corporate investors, and other sources. This allows companies to raise large funding rounds at high valuations while staying private.

  • Delayed IPOs - Many startups, even large mature ones, have chosen to stay private longer before going public. This allows their valuation to grow to over $1 billion privately.

  • High startup valuations - Investors have been willing to pay higher valuations for equity in promising startups, especially in trendy spaces like AI, blockchain, and consumer internet. This drives up paper valuations.


Some examples of current papercorns include:


  • Stripe - The payments startup valuation decreased to $50 billion following $6.5 Billion raise 2023. It has chosen to stay private despite its immense size and decrease valuation.

  • SpaceX - Elon Musk's rocket company has raised over $10 billion. It remains privately held.

  • Epic Games - The maker of Fortnite has garnered valuation over $17 billion privately amid gaming's rising popularity. It continues to resist an IPO.


The proliferation of papercorns signals the growing maturation of the private startup market. As companies stay private longer, their unrealized paper gains accumulate to reflecting staggering valuations. However, these values are merely theoretical until the companies get liquidity from M&A deals or IPOs. Papercorns' eventual success depends on living up to their lofty valuations in the public markets.


The Risks and Rewards of Papercorns


Papercorns present a dichotomy - they appear to be massive success stories on paper, yet still carry substantial risks due to their private status. Investors should understand these factors:


Potential Rewards:


  • Getting in early - Investing in a papercorn early on can reap huge returns later if the valuation continues rising.

  • Access to hot deals - Papercorns are often buzzworthy startups that draw investor interest for being in popular sectors.

  • Prestige - Owning a stake in a headline-making $1 billion+ startup carries prestige and bragging rights for investors.


Potential Risks:


  • Overvaluation - The high paper valuations may exceed the true worth of the startup. Without market validation, these valuations are subjective.

  • No exit horizon - Papercorns do not have a definite timeline for an IPO or acquisition, keeping investor money locked up.

  • Failure risk - Papercorns can still fail like any other startup. Investors may lose their entire investment.

  • Dilution - Papercorns often raise more rounds, which dilutes earlier shareholders. IPO entry valuations may also be lower.


Overall, papercorns present a bold new frontier in startup investing. Those who can stomach the risks have the chance for major returns. However, investors should weigh the benefits and dangers before chasing the next hot papercorn. Valuations rising in private may not sustain in public markets. But some papercorns will go on to become the giants of tomorrow.

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