Though some may be pessimistic about the device industry’s future, venture capitalists are feeling good about it. According to a report released by PricewaterhouseCoopers (PwC), medical device companies attracted $841 million in venture capital funding in the second quarter of 2011, a 26% bump from the previous quarter. Life sciences companies in general attracted $2.1 billion in the second quarter of 2011, which represents a 37% increase.

“I actually thought they were good, they were good numbers,” says Tracy Lefteroff, global managing partner of the venture capital practice at PwC. “I think that shows that even in some tough times with the FDA and things that are going on in Washington, which have a negative impact on the sector, that venture capitalists still believe there’s opportunities there and are continuing to put money to work there.”

Medical device companies attracted 9% more total dollars in the second quarter of 2011 than in the second quarter of 2010, though that money went into 90 deals, a 17% drop. In the life sciences sector generally, deal volume fell 21% year-over-year and total dollars dipped 3%, though the average size of those deals was relatively high, at $10.1 million.

Lefteroff says uncertainty over FDA has venture capitalists concerned that they’re going to have to carry device companies for a longer period of time than they would have previously. “They’re putting a little more money into each of the rounds so that they can take these companies a little longer than what they probably had previously projected when the FDA 510(k) process, for instance, was a little more transparent than it is today,” Lefteroff says. “There’s still been good mergers and acquisitions (M&A) activity in the space, so I think that still encourages venture capitalists to deploy capital and fund these companies.”

Lefteroff says the sector has seen some “pretty nice exits” recently, with several companies being bought at levels that represent a significant windfall for venture capitalists.

“The returns are there, and that’s why venture capital funds continue to put money into the space,” he says. Big medical device companies, he says, are continuing to snap up the younger companies with innovative products, a trend that Lefteroff doesn’t believe “is going to slow down at all.”

“In fact, as time goes on, you may even see that pick up somewhat, because most of these major companies are putting tremendous amounts of cash on their balance sheet, and they’re either going to use that for M&A or pay dividends, and I would say the bias right now is that they’re using that for M&A.”

Lefteroff doesn’t think the recent economic upheaval will have much of an effect on venture capital in the industry in the third quarter. The turmoil, he says, is centered around the economy’s difficulty in creating jobs, but medical device companies focus on R&D, not employment. “If you look at corporate profitability, most companies are doing pretty well,” Lefteroff says. “So I don’t think that’s going to impact investment that much in this sector, as long as corporations are doing well and they’re continuing to buy these companies.”

Lefteroff says even though V.C. numbers are up for the sector, it doesn’t disprove worries about a lack of domestic innovation.

“Because innovation is happening, it’s just happening overseas,” he says. Companies are attracting funding, he says, by pursuing a European regulatory strategy. A company will get a product approved for market in Europe, which will persuade a bigger company that the product is worth investing in, and result in a merger or acquisition. “So they’re getting liquidity based on proof-of-concept overseas, as opposed to having that done here in the United States, which is the way it used to be done,” he says.

—Thomas Blair