Venture capitalists invested $6.5 billion in 890 deals in the third quarter of 2012, according to the MoneyTree Report from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters.

Quarterly venture capital (VC) investment activity declined 11% in terms of dollars and 5% in the number of deals compared to the second quarter of 2012 when $7.3 billion was invested in 935 deals. Investment for the first three quarters of the year was $20 billion into 2,661 deals, a level well below this point last year, making it likely that 2012 will fall short of 2011 in terms of both dollars and deal volume.

"The decline in funding for Seed/Early stage companies is firmly in place—we've seen a drop in dollars and deals both quarter-over-quarter and year-over-year," said Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC U.S. "We're seeing fewer new venture funds being raised which means less capital is available for new investments. And, we're seeing venture capitalists be very cautious with the capital that is available due to the lack of a significant number of liquidity events. Instead, venture capitalists are continuing to support the companies already in their portfolio."

“The third quarter numbers tell a story consistent with investment themes we have been seeing throughout 2012,” said Mark Heesen, NVCA president. “Information technology investment continues to be very strong, particularly in the Internet arena while life sciences investment remains low, reflecting ongoing concerns regarding regulatory uncertainty, capital intensity and investment time horizons in the space. We also continue to see clean tech investment shifting concentration to smaller, more capital efficient deals. Opportunities continue to abound in each of these sectors, but lower venture fundraising levels will push investment dollars down as the industry recognizes it cannot put out more money than it takes in.”

The Software industry received the highest level of funding for all industries with $2.1 billion invested into 304 deals during Q3, marking the fourth quarter in the last five in which investment in Software exceeded two billion dollars. This level of investment represents a 12% decline in dollars and a 1% increase in deal volume from the second quarter when $2.4 billion was invested in 300 deals.

Life Sciences (Biotechnology and Medical Devices) investing increased in terms of dollars but declined in deal volume for the third quarter of 2012, with $1.7 billion going into 181 deals, comprising 26% of VC dollars invested. Investment in Biotechnology increased by 64% in terms of dollars and 22% in terms of deals with $1.2 billion going into 116 companies in Q3. This increase is driven by a number of larger, follow-on rounds in the third quarter compared to Q2 when just $755 million went into 95 companies. Medical Device investing declined for the third consecutive quarter, falling 37% in dollars and 27% in deal volume with $434 million going into 65 companies, experiencing the lowest dollar level of investment since 2004. Overall, Life Sciences investment for the first three quarters of 2012 is down 19% in dollars and 12% in deals from the same time period in 2011.

Venture investment declined across all stages of development in both dollars and deals in the third quarter of 2012. Seed stage investments fell 22% in dollars and 7% in deals with $178 million invested into 67 deals in the third quarter. Early stage investments also declined, falling 21% in dollars and 7% in deals with $1.7 billion going into 395 deals. Seed/Early stage deals accounted for 52% of total deal volume in Q3, compared to 53% in the second quarter of 2012. The average Seed deal in the third quarter was $2.7 million, down from $3.2 million in Q2. The average Early stage deal was $4.4 million in Q3, down from $5.2 million in the prior quarter.

Expansion stage investment decreased just 3% in dollars and 1% in deals in the third quarter, with $2.6 billion going into 241 deals. Overall, Expansion stage deals accounted for 27% of venture deals in the third quarter, and the average Expansion stage deal was $10.8 million, down from $11.1 million in the prior quarter.

Investments in Later stage deals decreased 10% in dollars and 4% in deals to $2.0 billion going into 187 rounds in the third quarter. Later stage deals accounted for 2% of total deal volume in Q3, similar to Q2 when $2.2 billion went into 195 deals. The average Later stage deal in the third quarter was $10.5 million, which is a slight decline from $11.2 million in the prior quarter.

First-time financing (companies receiving venture capital for the first time) dollars declined 8% in dollars to $1.0 billion in Q3, but the number of deals increased 1% to 297 deals in the third quarter. First-time financings accounted for 16% of all dollars and 33% of all deals in the third quarter, compared to 15% of all dollars and 32% of all deals in the second quarter of 2012.

Companies in the Software, Media & Entertainment and IT services industries received the most first-time rounds in the third quarter. The Biotechnology sector experienced a continued drop in first-time deal volume to just 15 rounds in the third quarter while Medical Device first time financings remained low at 17 rounds. The average first-time deal in the third quarter was $3.4 million, down slightly from $3.7 million in the prior quarter. Seed/Early stage companies received the bulk of first-time investments, garnering 82% of the deals.