It doesn't mean that they think someone would buy the company for $1B now. It means that they purchased some stock for a price equivalent to buying all of the stock for $1B, and that they believe that this is a good bet to make given their risk tolerance, the possible outcomes for the company, and the likelihood of those outcomes.
I think that's what I mean - I hear "company valued at 1 bn dollars" and I have to do this mental and linguistic gymnastics leap.
A list of 40 companies valued individually at 1 bn is a bubble, a portfolio of companies only a fraction of which will generate significant returns is a sensible investment spread.
But that is not what the words used mean when I look in a dictionary. Especially as few investors have all of these in their portfolio (if any).
The verbal gymnastics required to differentiate between what VC's seem to mean by valuation and the common-sense use of the term is one of the key things that makes this a bubble.
VC's are okay buying a share of a company as-if the company were worth a billion+ because they (rightly) believe that they can (frequently) turn around and exit in an IPO and get a significant return by convincing others that the company is worth a lot of money – never mind that the long-term financials and competitive advantages aren't there to back that valuation up.
As a (relatively) short-run money making scheme, many of the VC's have it spot-on, but at some point, if the markets can't sustain the aggregate valuations of all of these multi-billion dollar valuations, the IPO values will dry-up and someone's going to be left holding the bag. That is to say, the bubble will burst at some point if it's not carefully deflated.
