#StartupsEverywhere Profile: Michael Hiles, CEO, 10XTS
This profile is part of #StartupsEverywhere, an ongoing series highlighting startup leaders in ecosystems across the country. This interview has been edited for length, content, and clarity.
Developing Technology Products for Capital Markets
Located in The Queen City, software startup 10XTS is using blockchain and distributed ledger technologies to help drive the next generation of regulatory compliant financial services data management. We recently spoke with Michael Hiles, 10XTS’s CEO, to learn more about his startup’s work, the Cincinnati startup ecosystem, and his work on behalf of the Token Taxonomy Act to support the development of the U.S. blockchain industry.
Can you tell us a little about yourself? What is your background?
I started out on mainframes in the late 70s as a little kid. My dad worked in sales for one of the first software companies ever Cincom Systems, based in Cincinnati. So I have caught every technology curve for 40 years now. I started a web development company in 1995 and spent my dotcom era selling websites to small businesses. Then eventually took web tech into enterprise and specifically state & local government. I am one of those people who have deep engineering & data along with business development & capital structure rattling around in my head.
Tell us about 10XTS. What is the work you’re doing?
Capital efficiency from a fund management standpoint is something that we hone in on. We target funds and banks, and we’re also pushing into public finance and public debt— particularly state and local bonds from an asset class standpoint. We’re working very heavily to bring solutions forward in that market.
What's the potential of blockchain technology?
Our focus is not necessarily the blockchain, but rather how to connect real world documents and data to a blockchain. We’re more interested in how you can create an immutable link as a single source of truth between existing structured and unstructured data and transactions on a ledger. This is an important advancement in records management as a whole.
Now I can affirmatively, in a legal sense, prove when somebody says, “This token on this ledger represents a share of a stock in this company.” So my first question is: “Prove it.” Well, how do you prove it? How do you immutably connect the artifacts of a transaction to the transaction itself?
Where blockchain as a technology goes on a macro level is really up for grabs. I don’t think blockchain technology is going anywhere anytime soon, and I think it’s going to settle back into the vocabulary of the CIO and the IT folks as just another form of data, because that’s all it is. There’s nothing magical about it. It’s just a better form of spreadsheet, it’s a better database, and it’s a decentralized way to create mortar between the bricks of data repository. You as an end user won’t even know you’re using blockchain because your blockchain-powered app is still going to present some account information or data to you in a human-readable form.
Can you tell us about your work on the Token Taxonomy Act? Why is the legislation so important?
I’m in Ohio’s 8th Congressional District, so I went to talk to my congressman— Rep. Warren Davidson (R-Ohio)—early in 2018 about the issue of compliance and what he was doing. I knew Rep. Davidson was on the Financial Services Committee, and I first met him a few years back when he was elected to serve the remainder of Speaker John Boehner’s term. So here I am working on building up fintech in the district, and he’s obviously the guy to go talk to about it.
I had already been to D.C. and to the Chamber to talk about how, while ICs are not within compliance regulations, they’re also not the problem. They’re a symptom of a deeper underlying problem, which is the difficulties a company goes through in order to organize and secure capital. My argument has been that there’s this pent up demand on the other side of the market for people wanting to participate in wealth creation activity, and ICOs represent an opportunity for the average person to invest in a tech startup.
So when you look at that, that whole cycle isn’t the problem. The problem is the accredited investor definition and regulations not being widely adopted. So how do entrepreneurs and innovators secure the capital that they need to build their team? I got the conversation going with Rep. Davidson that’s it’s very risky to go in and just propose changes to the law because technology changes rapidly and the law doesn’t. So I told the congressman that we can’t go in and pass laws without being deliberative with intermediary steps and just inject taxonomy into the federal code.
Around mid-2018, I suggested that we needed an inclusive industry-focused approach. So Rep. Davidson and Reps. Tom Emmer (R-Minn.) and Darren Soto (D-Fla.) and some other lawmakers organized a roundtable event later that year on Capitol Hill with around 50 top industry representatives. I participated in the roundtable as well and highlighted that regulators are concerned about fraud and protecting people financially, but anyone can go down to their local store without an ID and buy a lottery ticket with cash. Well, why can’t you let those same people invest in technology?
That was in September, and then I submitted a position paper to Rep. Davidson on what that draft bill should look like. The first version of the Token Taxonomy Act was introduced at the end of the session in 2018 as a trial balloon. It’s been reintroduced this session, but so far we have not gotten a hearing date.
What policy issues do you think should receive more attention from federal policymakers? Are there any policies at the federal, state, or local level in particular that have helped 10XTS grow?
I’ve been a big advocate of the democratization of capital, including through Title III of the JOBS Act. Anything we can do to increase capital access from the innovator and entrepreneur side is important.
We experience an interesting condition here in the flyover region. The lack of access to capital means you either have to travel outside the region—which raises the cost of your capital—or you have to accept bad term sheets from really exploitative, early-stage investors because they know they’re the big fish in the small pond. Startups on the coast don’t experience that as much. So anything that helps bring a normalization to capital access in the interior is something that I’m very keenly interested in.
I’m interested in any policy that advances that, like smart cities. It’s been kind of a flashpoint idea that’s faded away a bit over the past year, but I think there’s still a fair amount of money and interest in automation and bringing technology into communities based on the smart cities platform.
What makes Cincinnati’s startup ecosystem unique?
Like with all communities, it’s a mixed bag. I think Cincinnati has done a really admirable job of promoting the brand and the idea of startup sensity. It has already gone through several evolutions itself as a community. We have one common organization the community, Cintrifuse, and I adore those guys.
The focus has really been around Cintrifuse as an organization, because they are the collective body borne out of the economic development push by the CBC, the Cincinnati Business Committee. They hired McKinsey & Company to come in and write a report, and the report was around capital and capitalization. And they said we could benefit from a syndicate fund structure. So all of the corporate companies in Cincinnati, all of the big players, they passed a hat around and started a fund. Now they’re on fund two.
It’s a great ecosystem, and I think we’re far ahead of a lot of other midwestern regionalized ecosystems. I think a lot of coastal investors are realizing that if they put money in a midwestern company, or a midwestern fund, it’s like a 3x on the runway, just because the cost of living is so much cheaper. We’ve got a lot of advantages that remain largely untapped, and as capital figures out it can be anywhere, it’s just a function of whether the partners want to attend a board meeting in the Midwest.
What is your goal for 10XTS moving forward?
I’m at the seed stage now, and we’ve got traction with our paid pilot. But I’m living 90 days at a time, based on selling convertibles as I go. My goal is to try to get out of the hamster wheel of perpetual capital raising now that I’ve got some traction I can bring a bigger round, and that will allow me to plan for what I’m going to do in five years. Cause right now I’m planning what I’m going to be doing in six months when our cash burn doesn’t match our income.
All of the information in this profile was accurate at the date and time of publication.
Engine works to ensure that policymakers look for insight from the startup ecosystem when they are considering programs and legislation that affect entrepreneurs. Together, our voice is louder and more effective. Many of our lawmakers do not have first-hand experience with the country's thriving startup ecosystem, so it’s our job to amplify that perspective. To nominate a person, company, or organization to be featured in our #StartupsEverywhere series, email edward@engine.is.
