Venture capitalists invested $5.8 billion in 758 deals in the first 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 fell 19% in terms of dollars and 15% in the number of deals compared to the fourth quarter of 2011, when $7.1 billion was invested in 889 deals.

The Life Sciences (biotechnology and medical device industries combined) and Clean Technology sectors saw marked decreases in both dollars and number of deals in the first quarter. However, there were double-digit percentage increases in dollars invested in the Consumer Products and Services, Medical Device and Telecommunications industries. Additionally, investments into companies in the later stage of development rose 11% and accounted for 40% of total dollars invested during the first quarter.

"Venture capitalists remained cautious during the first quarter after a lackluster fourth quarter in the public markets, as evidenced by the shift from investing in earlier stage companies to a focus on later stage companies. Given that we saw an improvement in the public markets during the first quarter, we could see VCs return to placing their bets on seed stage companies in the coming quarters," said Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC U.S. "While on the surface, the jump in dollars invested in the Medical Device industry during Q1 may seem surprising given the 22% drop in Life Sciences funding, a deeper dive shows that companies in the later stage of development accounted for more than half of the investments in this industry. A more active M&A market may be the reason the biotech industry experienced a decline in investing in Q1, as VCs saw more of their portfolio companies experience exits during the first quarter."

"The overall decline in investment in the first quarter underlies several shifts occurring in the venture space," said Mark Heesen, president of the NVCA. "The industry continues to contract and consolidate, which is beginning to manifest itself in fewer dollars being invested in fewer deals. Yet, we feel the overall impact will be positive for the asset class as only the best entrepreneurs and technologies will be funded at rational valuations. As innovation continues to advance at a very quick pace, we suspect many seed stage companies are being funded in stealth mode, forming a pipeline that is not yet visible to the public eye. Lastly, with the exit market improving, we hope to see venture capitalists in a position to focus more on first time deals in the coming months and less on sustaining mature companies that have been held back over the last few years. All of these factors equate to an industry that is well positioned to optimize its performance in the coming decade."

The Biotechnology industry was the second largest sector for dollars invested, behind Software, with $780 million going into 99 deals, falling 43% in dollars and 14% in deals from the prior quarter. The Medical Devices and Equipment industry rose 33% in Q1 to $687 million, while the number of deals dropped 6% to 72. Overall, investments in the Life Sciences sector (Biotechnology and Medical Devices) fell 22% in dollars and 11% in deals, the fewest number of deals since the first quarter of 2009.

Overall, seed-stage investments fell 9% in dollars and 41% in deals, with $141 million invested into 53 deals in the first quarter. Early-stage investments fell 31% in dollars and 24% in deals with $1.6 billion going into 290 deals. Seed/early-stage deals accounted for 45% of total deal volume in Q1, compared to 53% in the fourth quarter of 2011. The average seed deal in the first quarter was $2.7 million, up from $1.7 million in the fourth quarter. The average early-stage deal was $5.6 million in Q1, down from $6.1 million in the prior quarter.

Expansion-stage dollars decreased 32%, with $1.7 billion going into 207 deals. Overall, expansion-stage deals accounted for 27% of venture deals, a slight uptick from 26% in the fourth quarter of 2011. The average expansion-stage deal was $8.3 million, down from $10.9 million in the prior quarter. Investments in later-stage deals increased 11% in dollars and 13% in deals to $2.3 billion into 208 rounds in the first quarter. Later-stage deals accounted for 27% of total deal volume, compared to 21% in Q4 when $2.1 billion went into 184 deals. The average later-stage deal was $11.0 million, down slightly from $11.2 million in the prior quarter.

First-time financing dollars (companies receiving venture capital for the first time) fell 22% to $783 million in Q1, the third lowest level in survey history. The number of deals fell 28% to 195, the lowest level since the third quarter of 2009. First-time financings accounted for 14% of all dollars and 26% of all deals, compared to 14% of all dollars and 30% of all deals in the fourth quarter of 2011.

The Life Sciences sector experienced a dramatic drop, falling 60% in dollars and 43% in deals, to $120 million going into 21 companies. The average first-time deal in the first quarter was $4 million, up slightly from $3.7 million in the prior quarter. Seed/early-stage companies received the bulk of first-time investments, garnering 81% of the deals.