It's actually called Castle-in-the-air theory, it was originated by John Maynard Keynes in 1936, and it supposes that the intrinsic value of a stock doesn't matter at all, it's all about the ability to find a greater fool who will pay more than you did. So long as someone paid that much for it, that much is de facto what it's worth.
Valuations work like this:
Let's suppose kleinbl00, inc. has a million private shares. This is an arbitrary number, as number of shares is always arbitrary. Now let's suppose that in exchange for three dollars of startup capital (you buy me coffee) you were given one share. The "valuation" of kleinbl00, inc. is now three million dollars, because it's assumed that if one person paid $3 for one share, all people will pay $3 a share.
Now let's suppose mk buys me a burrito in exchange for a share. That share is now valued at $5. kleinbl00, Inc. is now worth five million dollars, even though 999,998 of those shares aren't in circulation and belong entirely to me. You're happy because your investment has increased by 60%. mk is happy because he's now an investor in a five million dollar company. I'm happy because you suckers made me worth about five million dollars.
But suppose instead that I want pizza. bfv isn't particularly impressed by my business plan, so he wants ten shares to buy me a $10 pizza. CATASTROPHE. mk's investment just took an 80% haircut. Your holdings have plummeted 66% from your initial investment and 80% since the 2nd funding round. Meanwhile me? I'm still worth a million dollars.
But I'll take five hundred thousand for the whole kit and caboodle to cash out. You get 50 cents, mk gets 50 cents, bfv gets five bucks, and I get enough to buy a small condo all without ever actually making anything.
Ain't capitalism great?