I imagine this scenario: a new Valley startup is formed (STARTR). A Valley venture capital firm (FUNDR) funds them with 10$ million. STARTR proceeds by spending the 10$ million on various products/services, such as engineering, food, furniture, hardware, offices, SaaS & software, transportation, etc. All of these products/services are likely provided by other Valley startups or businesses, as that is one of the points of being located in a hub as a new startup.

FUNDR, which is a smart VC firm that diversifies their portfolio, likely has investments in most if not all of these product/service providers that STARTR buys from. Of course, FUNDR incentives STARTR to spend their money on specific products/services by offering STARTR discouns provided through "their connections". FUNDR's investment in STARTR is therefore only moved around their own portfolio and is never lost. Or, in worst case, part of the investment ends up in FUNDR's partner or rival firms, which probably face the same situation where at some point the opposite happens to them and that part of the investment is returned to FUNDR by the same reasoning.

If STARTR fails then FUNDR has not actually lost anything, their investment has only been moved to other companies in their portfolio. If STARTR succeeds then more money starts flowing in to the eco-system, from foreign customers and foreign investors, which are used to buy even more products/services from FUNDR's portfolio companies (and cashed out via stocks obviously). As for engineering salaries; that part of the investment is paid off 2x-10x through the successful ventures where money is generated from abroad. FUNDR ends up always getting richer; it's either break-even or win for FUNDR in the long run.

Is this a likely scenario of how things work? If so, is this also the reason why Valley valuations of startups are so outrageous because VC's very well understand this kind of eco-system?