This is a misunderstanding. Lack of liquidity can cause both. You forget that prices are valuations and are very different from prices actually paid. Simply pu

This is a misunderstanding. Lack of liquidity can cause both. You forget that prices are valuations and are very different from prices actually paid. Simply put: 1) valuation = price of last share sold * number of shares 2) value = price at least one buyer is prepared to pay for the entire company Lack of liquidity in private companies generally comes from the fact that you can't buy or sell shares without agreement from the board. So "price of last share sold" is quite simply directly set by the board, people who have a vested interest in this number being as high as possible. It is normal for valuation to be larger than value (for public companies), but not by much. You could actually buy (very nearly) all of Microsoft for 360 billion dollars (it's market cap). A bubble can probably be best defined as valuation >> value.