This is exactly what I was wondering about. Take snapchat for example, how are they getting revenue from funding or off their users somehow?
Are the VCs funding hoping that a company gets picked up by Google, FB, Twitter etc...?
If that were true then they probably wouldn't have turned down Facebook's $3 Billion.
They're gambling on getting an even larger userbase and having Facebook offer $5B
The liquidation preferences matter a lot. The company can sell for a tenth of what the valuation is now, maybe even less, and the investors would still break even. There aren't a lot of new consumer companies with zillions of users to invest in so they might as well, because the downside isn't that bad and the upside is... who knows?