Venture capitalists shied away from riskier med-tech bets during the 1st quarter of 2012, sticking more often to companies they had invested in previously or device makers nearing an exit.

Medical device VC funding increased to $687 million, a 6% jump from the same period last year and a 33% spike over the previous quarter, even as investment in life sciences overall decreased 22%.

"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," PwC global managing partner Tracy Lefteroff said in the report. "A deeper dive shows that companies in the later stage of development accounted for more than half of the med device investments."

The number of deals decreased during Q1 to 72 total, a 16% decline from the same period last year and a 6% drop compared with Q4 2011.

First-time investments saw a dramatic 38% slide year-over-year and 4% quarter-over-quarter. Follow-on funding saw less-dramatic decreases of 4% and 15%.

"The life sciences sector continues to face challenges such as regulatory and reimbursement uncertainty and a lengthy approval process that might tend to discourage some investors," Lefteroff said. "Venture capitalists were more willing this quarter to fund companies closer to an exit at higher dollar levels," he added.

"Yet venture capitalists in this space recognize opportunity for innovative companies with breakthrough products to overcome the risks involved and move toward an exit," he added.

Q1 investment in early-stage med-tech companies decreased 13% compared with the previous quarter and lost 9% compared with last year; late-stage investments soared 61% year-over-year and increased 13% quarter-over-quarter. But analysts remained bullish about startups that may be able to step in and fill the vacancies left by the companies who achieve exits.

"As late-stage med-tech companies moved closer to an exit, investors were more willing to back them," Lefteroff said. "As these companies achieve exits, investors are likely to turn to earlier-stage companies to replenish their portfolios."

PwC analysts maintained an optimistic outlook on the near future, noting that strong venture-backed deals during the 1st quarter may extend into Q2. They added that the passage of the JOBS Act, which gives some "emerging growth companies" a grace period in meeting compliance with certain disclosure and auditing requirements, allows start-ups and small businesses "more flexibility to plan their access to public markets and incentivize employees."

"Venture capitalists remained cautious during the 1st quarter, as evidenced by the shift from investing in earlier-stage companies to a focus on later-stage companies," Lefteroff said. "Given that we saw an improvement in the public markets during the 1st quarter of this year, we could see venture capitalists returning this year to place their bets on seed-stage companies."

Other highlights from Q1 include:

• The top regions for med-tech funding were Boston, with $150 million, followed by the San Francisco Bay area, Los Angeles, the Great lakes region and San Diego Metro.
• Medical/health products and medical diagnostics funding decreased 65% and 31%, the larger medical therapeutics market gained 32% year-over-year.
• There were 5 venture-backed life sciences IPOs during the 1st quarter, which raised a collective $315.5 million.
• The 2 largest M&A deals closed in Q1 came from the life sciences sector: Covidien (NYSE:COV) acquired Barrx Medical for $325 million and Celgene Corp. acquired Avila Therapeutics for $350 million.