VCs as Unidirectional Market Makers

I feel the proudest when I can defend maligned and vulnerable groups so today the subject of my compassion is the VC industry (and no my fundraising plans have nothing to do with this heroism). Here we go:

When people complain about VCs being "herd animals", one can often sense some attribution of irrationality. But prima facie, it seems rational for VCs to behave in more 'herdy' ways relative to public market or private equity investor.

The misunderstanding comes from interpreting an increase in price as a negative signal for investing. After all, the asset you wanted to buy just got more expensive, reducing your expected returns. So it seems odd that VCs update positively not negatively on increased demand (which is equivalent to a price increase).

In public markets, a price change is neither negative nor positive (a la Scott Sumner - Never Reason from a Price Change). The new price just reflects the most updated supply-demand equilibrium. In more liquid markets, the price change itself shouldn't be a catalyst for action, unless you have a very good reason to believe that this particular change reflects some mispricing/irrationality on behalf of other investors. In fact, if you're a market maker who doesn't necessarily follow any particular security, an increase in price, all else equal, would make you adjust your bid/ask upwards.

However, in VC markets:

(1) The amount of relative signal to be found in the the price change (via actions of other market participants), is much higher since there is not much else to go by (relatively speaking) and the market participants are all institutional and visible to you.

(2) Unlike market makers, VCs aren't making a two sided market so they can't totally ignore the price increase but given the importance of avoiding false negatives in VC, the downward update on price is negligible. In other words, it makes sense to be price insensitive on any given deal.

(3) The company's odds of success are it self substantially improved by having multiple backers - since more capital gives a company longevity via more shots on goal etc.

Now, one could question how rational it is to update this way from a mimetic process that might be on much shakier epistemic grounds than it appears. If literally everyone reasons this way, you'd be acting on a worthless signal. It is also true that there are perverse incentives to fail with the herd, as being wrong alongside everyone else is less damaging institutionally than being wrong alone.

That said, perhaps the meta game in VC is having a pulse on the levels of herdiness in the market to figure out when it makes sense to act more or less 'herdy' yourself?