The real estate market provides an excellent analogy. Anyone who has dealt with real estate appraisals knows that two key elements are location and comparables - what similar houses in the neighborhood are selling for. In the case of a private company valuation, substitute industry sector for location. A house's condition also affects its salability. A company with a fully formed business plan and a strong management team would receive a higher valuation than a one in which investors would have to put in a lot of time and effort.
People invest in real estate with the thought of selling for a profit.
Each venture capitalist fund has its own requirements for valuation driven by its investment strategy. Different funds will have different ways of providing value, either through the amount of money invested or through the time the firm's partners spend on each investment. Every home seller believes his property is special and deserves to be fully valued. Every entrepreneur feels the same way. But market forces are the ultimate judge of value, whether you are engaging in a real estate transaction or a venture deal.