There are several reasons why overvaluation happens, including:
1. Market Hype: Sometimes, new industries or technologies generate significant excitement, leading to inflated valuations. For instance, sectors like artificial intelligence and blockchain have seen instances of overvaluation due to market hype.
2. Competition Among Investors: When multiple investors compete to fund a promising startup, they may drive up the valuation to secure their investment.
3. Ambitious Projections: Founders might present overly optimistic financial projections to attract investment, leading to overvaluation.
4. Media Influence: Media coverage can significantly impact public perception and, consequently, a startup's valuation.