Opinion: Private Equity Firms May Get Scarce

With less capital allocated to the venture and private equity space, there will be fewer of these firms tripping over themselves to get deals done. The deals that do get done will be at lower valuations, as investors anticipate lower valuations for exits. With the drop in capital and deals, there will also be a great reduction in these firms -- by as much as 50% in the next five years.

Will there still be innovation? Of course. Angel investors like Ron Conway, Marc Andreesen, Roger Ehrenberg and Howard Lindzon and early-stage investors like Josh Kopelman's First Round Capital will still make early investments in the venture space. In fact, it's cheaper than ever for small investments to take companies like Twitter very far. (This bit of good news, sadly, doesn't apply to the PE industry.)

Many Silicon Valley cheerleaders like to point out that Google (GOOG) was started in the last downturn. The Valley came back from the 2000 bubble, so it will come back again, they say. The gray-haired men of the private equity megafunds also like to say that their industry has lived through downturns before and will get through this time. I don't think so. We are living in a moment where something's been broken in our midst and it will not soon be repaired.

Companies will still get taken private and tech companies will still get bought by Yahoo! (YHOO) and other big names, sure as night will follow day. There just won't be as many deals, and they won't be for as much.

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