US private equity is on the rise, growing 33% in 2006 over 2005! According to Dow Jones & Co’s Private Equity Analyst, US private equity firms* raised a total of $215.4B in 2006, smashing the previous record of $177.1B set in 2000.

However, despite this massive growth in private equity, venture capital actually declined by 2% from 2005. VC as a percentage of private equity declined from 16% in 2005 to 12% in 2006. Clearly there is a shift away from riskier early stage investments, and towards investments in more mature companies in the form of LBOs and similar.

I heard it said at a VC panel last year that the VC industry as a whole is not doing well, and unless you’re a top quartile VC your returns aren’t very likely to beat an index fund (sorry I forget the source).

So what does this mean for entrepreneurs? VC is fuel that keeps silicon valley’s flame burning bright – will there be flow through effects on the number of startups we see emerge in 2007? My feeling is probably not – because we are also seeing a greater number of startups that are self-funded, or angel funded, largely due to the current ‘web 2.0′ boom in which a company can start with little more than a couple of programmers and a hosting account.

Entrepreneurs, by their nature, are tenacious and extremely good at getting things done with limited resources. As long as silicon valley remains a wellspring of entrepreneurial spirit, I think we will continue to see some of the world’s best innovation emerge from the shores of the San Francisco Bay.

It will, however, be interesting to see whether this shift in private equity is a broader trend, or just a phase in the cycle.

* Private equity firms include: venture capital, buyout, mezzanine, distressed debt and secondary funds, and funds of funds.