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VC's loose money all the time, in fact the majority of VC funds loose money or have very poor returns.

Problem with your analysis is that vast majority of fund raising rounds go to salaries, and converting operating spending into equity value is very challenging and not a "efficient" transformation.

Also the ecosystem out here is quite large, with each fund being just a small fraction of companies being funded.

That being said, it is a widely held belief that something like what you described inflated the dot com bubble