Venture-capital firms and early-stage companies could see a major fall in their fortunes this year. A combination of inflated valuations, unsophisticated financial models, and lack of investor perspective has led to an unsustainable bubble in the start-up sector and the firms that fund it.

The venture-capital industry has ballooned over the past decade. Recent research has found that the size of the sector has effectively tripled in just 10 years: in 2008, $53 billion was invested in start-ups, and by last year it was $160...