There are valid reasons to invest in a company that doesn't make profit now, but will in the future. Almost every business has this phase - it could be short (a lawnmower company that goes 5k in the hole for equipment) or big (a company with an idea to revolutionize the DVD to consumer marketplace, that starts operating at a loss until they build up the required customerbase).

Now, the big issue is that everyone thinks they're the company that's just operating at a loss right now, until they get the big break and start pulling in gigantic profit. That's simply not true for every startup, and right now I think we see VC is far too optimistic. But we don't want all the VC money to dry up, as then those companies that truly do have an amazing idea, that really will revolutionize their industry, will not not be able to get the necessary VC money to get past the unprofitable phase.