Defy Partners on Wednesday announced its second fund, with $262 million committed to invest in early-stage companies.
As larger, late rounds become more common in the world of tech investing — especially with the advent of the mega-size SoftBank Vision Fund — Defy Partners aims to retain larger stakes in early-stage startups, investing $3 million to $10 million in each startup it works with.
Its founders, the industry veterans Neil Sequeira and Trae Vassallo, are looking to capitalize on their successful first fund, which also focused on early-stage investments, with the new influx of capital from new and existing limited partners.
"When we first got together, we saw that there was, at the time, a proliferation of seed capital," Sequeira said. "For multifaceted reasons, it was easier for companies to raise seed or later-stage capital. We saw there was an opening to go for where the returns have always been great, and that's in early series A growth companies."
The reason for focusing on series A companies, the partners say: It's less risky than investing in seed-stage startups, because the company has at least started rolling out a product or service, even if all the particulars aren't quite in place yet. At the same time, the company is young enough that even with a relatively modest investment, the firm stands to make a tidy profit if and when a startup goes really big.
It's something they have some experience with: Sequeira led investments in Bustle and The Honest Company, and Vassallo invested in Dropcam and Nest.
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The history of Defy
Defy Partners has made 15 investments, according to Sequeira, including in companies like the student-focused cybersecurity startup Securly and the developer tool PullRequest. Sequeira expects the portfolio to grow proportionally with Fund II. Sequeira and Vassallo plan to continue pursuing early-stage, high-ownership bets in which Defy Fund is the lead investor on the round and gets a board seat.
After an entrepreneur has had seed funding and is "really trying to figure out how to build and scale a business, they want to add a board member," Vassallo said, adding: "The amount of experience and insight you can bring to the opportunity really matters."
Sequeira and Vassallo spent a large portion of the early 2000s at larger venture-capital firms — Sequeira at General Catalyst and Vassallo at Kleiner Perkins — when they first began to understand the market opportunity of early funding. Sequeira says he saw firms' growth funds as proof that high-ownership deals paid off most when an early-stage company grew into a unicorn. As the firms grew, both Sequeira and Vallasso realized their employers had morphed from early-stage venture firms into larger multistage venture businesses.
"Early-stage investors understand that you are involved in a whole set of actions to help build the business," Vallasso said. "In many cases the companies may have a working product but need to dial in product market fit or improve go to product strategy. They are struggling with big questions about how to scale the business. Later-stage companies have another set of very complex issues, but we love being close partners with entrepreneurs."
Ready for round 2
Part of Defy's partnership includes its Defy Sage program, which brings multitime CEOs on board to help portfolio companies scale. Sequeira says that one such "sage," whose focus is devices and hardware, introduced the firm to a stealth company that would be part of its Fund II portfolio.
Sages will have economic incentives in Fund II, Sequeira said. "This is a great opportunity to take some of the seed deals they've done or interesting things they've seen in the market and bring them to us for investment that will bring returns for everyone," he said.
The firm's second fund is a result of the successful first attempt, Sequeira said, adding that every limited partner from Fund I returned for Fund II in addition to new US-based institutions and individuals and that the firm largely turned away capital from hedge funds and international sources. Because the strategy for Fund II is the same as that of Fund I, both Sequeira and Vallasso are optimistic in their ability to make good on their commitments to the firm, its partners, and its portfolio companies.
"The size of this round is large, and we hope to diversify the portfolio," Sequeira said. "We want to participate in future financing to support these companies as they grow so we retain ownership."
