I'm not sure why people even seek insane valuations - maybe VC push them into it or something? I don't know.
Because the founders get to keep more ownership of their company. If I take an investment of $100 million at a $1 billion valuation I own 90%. If the valuation is only $500 million I only own 80%. Why the company needs such a huge investment is a fair question but the insane valuation makes sense.