Young technology start-ups that hadn’t received funding before drew a steady stream of cash from investors during the first quarter of 2005, despite a dip in overall investments to $4.6 billion from $5.4 billion in the last quarter of 2004.

According to a report released Tuesday, 197 companies attracted their initial round of venture capital funding during the first quarter, totaling $1.2 billion and representing 26 % of all investments for the quarter. That marks this stage’s largest percentage since 2000. The quarterly average of first-time financings in 2004 was $1.1 billion. This report, called the MoneyTree Survey, was issued by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association (NVCA). 

While trending upward, expectations were that even more money would have poured into new companies during the first quarter, said John Taylor, vice president of research with NVCA. Many venture capitalists seek out very early-stage companies because they can have greater input with a young start-up, and early investments are often more profitable. “That’s an area we see good growth potential in the future,” Taylor says.

Sometimes investors look for companies that don’t have previous venture funding, but aren’t considered early stage either. Such was the case with the first quarter’s largest deal, a $108 million investment in anti-spyware maker WebRoot lead by Technology Crossover Ventures, Accel Partners and Mayfield. The company was founded in 1997 and already boasts a strong technology and executive team, according to one if its investors, and plans to use this infusion to fuel its enterprise and international strategies.

“We’re finding the 'white space' where companies are able to get up and running without the use of venture capital…sometimes those deals provide you better pricing,” says Tom Crotty, a general partner with Battery Ventures. Investors are also learning that some of the traditional IT markets are tapped out. “Most VCs recognize that telecom equipment and services and enterprise software, those spaces are so large…and not growing anymore. Most leaders in this business are trying to identify off-the-beaten-track investments.”

WebRoot’s deal is evidence that the security sector continues to be a main attraction for investors. During the first quarter the software category, which includes security software, saw $1.1 billion in investments, while telecommunications lagged behind at $371 million and networking and equipment saw $348 million, according to the MoneyTree Survey.