Venture capitalists invested $6.95 billion in 876 deals in the third quarter of 2011, 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 12% in terms of dollars and 14% in the number of deals compared to the second quarter of 2011, when $7.9 billion was invested in 1,015 deals.

The life sciences sector, biotechnology and medical device industries combined, saw marked decreases in both dollars and number of deals.

"Challenges in the regulatory environment for life sciences companies are prompting VCs to look to other industries to put their money to work for a faster return on their investment as indicated by the notable increase in software investments," said Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC U.S.

"Accordingly, over the past two quarters, we've seen a clear shift in life sciences investments from seed/early-stage companies over to more later-stage companies. VCs are continuing to support the companies in their pipeline, but appear to be curbing their investments in new life sciences companies. Despite the dip in life sciences and in the overall investment total for Q3, 2011 is still on track to exceed the $23.3 billion invested in all of 2010."

"Given the tremendous impact that venture capital has on company creation, it is easy to forget that our industry is small and highly susceptible to the many market forces presently at work," said Mark Heesen, president of the NVCA. "Public policy challenges in the life sciences and clean technology sectors are impacting investment levels this quarter as is the IPO market that basically came to a screeching halt in August. Venture fundraising levels are the lowest they have been in nearly a decade so it is reasonable to expect investment levels to decline in the coming years. Yet despite the challenges, the industry continues to fund new companies because history has shown us that innovation always prevails and there remains significant promise across all industry sectors for these emerging growth companies."

The biotechnology industry was the second largest sector for dollars invested in the quarter, with $1.1 billion going into 96 deals, falling 18% in dollars and 20% in deals from the second quarter. The medical devices and equipment industry also experienced a decline, dropping 18% in the third quarter to $728 million, while the number of deals fell 21% to 74 deals. Overall, investments in the life sciences sector (biotechnology and medical devices combined) fell 18% in dollars and 21% in deals, the second lowest quarterly deal volume since the first quarter of 2005.

To the contrary, healthcare services investments surged, with $152 million going into 11 deals, a 200% increase in dollars and 38% increase in deal volume over the second quarter.

There was a significant decline in the number and dollar level of first-time rounds in the life sciences sector. The average first-time deal in the third quarter was $4.5 million, down slightly from $4.7 million in the second quarter.