The number of U.S. venture capital investments in the first quarter slowed to the lowest quarterly total in at least six years, but early stage deals showed a slight uptick from a year ago, according to a report from VentureOne and auditing firm Ernst & Young LLP.

There were 474 equity financing rounds for U.S. venture-backed companies in the first quarter, dipping below 500 for the first time since at least 1999, and a 9% decline from the 521 deals reported a year earlier. The dollar amount invested also fell 16% to $4.6 billion in the first quarter from $5.45 billion a year ago.

The quarter's overall investment decline may be partly attributed to seasonality. Activity in the first quarter has slowed down each year for the past five years given that it is a more administratively focused period for many venture capital firms.

Jim Jones, managing director of BA Venture Partners, the venture capital arm of Bank of America Corp., said it is part of the "ebb and flow" of venture capital investing. He said typically the process from initially meeting with the company and then writing a check takes a few months. "It is part of venture capital lore that it is very difficult for companies to get financed in Q1, because a lot of venture capitalists aren't around in Q4," due to the holiday season.

Jones said venture capitalists are also being more selective and careful with their investments these days. "We always tend to be affected with what's going on in the public market. We all watch the stock market," and if the market is weak, it tends to make investors more wary, he said, although "this is a short-sighted view" as a venture capital deal is really a long-term investment.

The first quarter also continued a trend that gained traction during the course of 2004, in which a greater percentage of all deals were focused on early stage rounds. Some 32% of funding rounds this past quarter involved seed and first-round deals. That is up slightly from the first quarter of 2004, in which the percentage was about 30%.

Robb Browne, Ernst & Young's Silicon Valley venture capital advisory group leader, notes the continued strength in early stage rounds reflects a boon for Silicon Valley and other "hotbeds," where entrepreneurs are succeeding in securing capital to launch companies.

In addition, the report notes some venture capital firms may have directed their focus on fund-raising in the first quarter as indicated by preliminary fund-raising results this quarter.

The combination of new venture capital funds being raised and fairly strong merger and acquisition activity "provides a more optimistic environment for new company formation," said Matt Garlick, research manager at VentureOne. (VentureOne is a unit of Dow Jones & Co., publisher of this newsletter.)

Jones agrees, noting the exit environment has improved in 2004 compared to prior years. "The return environment for start-ups is pretty good," he said. "There is a lot of capital out there," which is encouraging to an entrepreneur. "A lot of VCs raised new funds, and when you start a fund, you are usually more aggressive with investing."

Looking at the data by sector, part of the quarter's decline is attributed to the health-care segment, where deals decreased 20% to 96 financings from 120 a year earlier. The dollar amounts declined 39% to $1.18 billion invested in health-care companies from $1.92 billion in 2004.

Within health care, biopharmaceutical deals fell 32% to 40 deals in the first quarter with less than half as much money invested as in the year earlier period. The 15 biopharmaceutical initial public offerings that occurred between late 2003 and early 2004 appeared to bolster biopharmaceutical investing last year, but investors may now be tempering their activity here as the IPO market has weakened.

Investment in information technology also declined, but not as steeply, with deals down 12% to 290 and capital invested decreasing 9% to almost $2.7 billion, compared to the year-ago quarter.

However, within this category, investment in communications companies appeared to have rebounded significantly after declining in the second half of 2004. There were 68 communications deals in the first quarter - only three more than the first quarter of 2004, but 26 more than occurred in the fourth quarter of last year. Venture investors kicked in about $605 million to the communications arena in this year's first quarter.

"Investors seemed to be refocusing on new communication start-ups, with the most early stage deal activity in this segment in three years," said John Gabbert, vice president of worldwide research for VentureOne. "The majority of these new financings were centered around companies providing connectivity products and wireless solutions, indicating investors still see opportunities in these segments."

Investment activity in software companies also held fairly steady with 148 deals and $1.23 billion invested, a 4% increase in capital compared to the first quarter of 2004. The largest investment of the quarter among all sectors was the $108 million round for Boulder, Colo.-based Webroot Software, a provider of anti-spyware and privacy protection software.

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