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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...?

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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?

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

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