A pair of VCs who invested in Nest and The Honest Company explain why they raised a $262 million fund to invest in young startups

Defy Ventures

Neil Sequeira and Trae Vallasso.

• Defy Ventures closed its $262 million Fund II to invest in early-stage startups.
• Firm cofounders and industry veterans Neil Sequeira and Trae Vassallo are looking to capitalize on their successful Fund I portfolio with the new influx of capital.
• As larger late rounds become more common, Defy Ventures aims to invest between $3 million and $10 million each in earlier-stage companies, taking a sizable chunk of ownership.
• Visit BusinessInsider.com for more stories.

Defy Ventures announced today 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-sized SoftBank Vision Fund - Defy Ventures aims to retain larger stakes in early-stage startups, investing between $3 million and $10 million in each startup it works with.

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Firm cofounders and 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. For multifaceted reasons, it was easier for companies to raise seed or later stage capital," said Sequeira. "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 they've at least started rolling out an actual 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 Vallasso invested in Dropcam and Nest.

Read More: US companies are going public later and later and it's having a major impact on investing

The history of Defy

Defy Ventures has made 15 investments to date, according to Sequeira, including in companies like student cybersecurity startup Securly and developer tool PullRequest. He expects the portfolio to grow proportionally with Fund II. Sequeira and Vassallo plan to continue pursuing early stage, high ownership bets where Defy Fund is the lead investor on the round and gets a board seat.

"After [an entrepreneur has] had seed funding and they are really trying to figure out how to build and scale a business, they want to add a board member. The amount of experience and insight you can bring to the opportunity really matters," said Vassallo.

Sequeira and Vassallo both spent a large portion of the early 2000s at larger venture 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 pay off most when an early stage company grows into a unicorn. As the firms grew, both Sequeira and Vallasso realized their employers had morphed from early stage venture firms into larger multi-stage venture businesses.

"Early stage investors understand that you are involved in a whole set of actions to help build the business," said Vallasso. "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 two

Part of Defy's partnership includes its Defy Sage program, which brings multi-time 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 will be part of Fund II portfolio.

Read More: These 10 early startups you've never heard of made the biggest buzz among VCs last quarter and raised hundreds of millions of dollars

"We are giving [Sages] economic incentives in Fund II. 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," said Sequeira.

The firm's second fund is a result of their successful first attempt, Sequeira says. He says every limited partner from Fund I returned for Fund II, in addition to new US-based institutions and individuals, and they largely turned away capital from hedge funds and international sources. Because the strategy for Fund II is the same as 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. We want to participate in future financing to support these companies as they grow so we retain ownership," said Sequeira.