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Crypto/Blockchain Interviews

Tom Trowbridge (YC 96), Former President of Hedera Hashgraph

Tom Trowbridge is former President of Hedera Hashgraph, a public distributed ledger based on the Hashgraph consensus algorithm. Mr. Trowbridge has been advising and investing in technology companies since 1996. He started his career in 1996 as an investment banker in the telecom group at Bear, Stearns & Co., and subsequently spent three and a half years at the telecom and media private equity firm Alta Communications, where he executed ten deals in technology, telecom, and media and served on two boards. Prior to Hedera, he started and ran the New York office for UK-based Odey Asset Management. Before Odey, he held various positions at Lombard Odier, Atticus Capital, and Goldman Sachs. Mr. Trowbridge graduated Beta Gamme Sigma from Columbia Business School and received his BA from Yale University, where he double majored in Political Science and History of Art.

The Politic: What’s your background, and how did you get involved in the blockchain space?

Tom Trowbridge: I started off in technology investment banking for two years right out of Yale. I was working at Bear Stearns, and then I moved to private equity for almost four years before going to business school. After business school, I moved to the asset management and hedge fund side. When I was an investment banker at the Telecom Group, I was doing deals around the 1996 telecom deregulation act. We had to be technically proficient enough to know the details of CLECs, DLECS, cable, satellite, etcetera. I wasn’t a computer scientist, but I had to be engaged deeply in technical areas. I continued that technology and telecom focus in my private equity role, where I invested in similar businesses and helped them grow.

After business school, I kept investing in technology companies. One of my investments was in a company called Swirlds, which had developed and patented the hashgraph consensus algorithm. It was pretty much just Dr. Leemon Baird and Mance Harmon at that time. After knowing them for several months, they asked me to co-found Hedera, which is the public ledger that uses the hashgraph consensus algorithm. Since they were both ex-Air Force officers, living in Texas with academic backgrounds, I brought a different network and complementary business-building skills to the team.

I’ve invested in a lot of companies, and I’ve built businesses within companies before, but I’d never actually done that on a standalone basis before. It was very fun, and of course, very intense. I’d been looking for something to do like that for a long time, and this was the perfect opportunity.

Some Hedera background: Hedera is a consensus algorithm which I describe as Ethereum but a thousand times faster and a million times cheaper. We raised $124 million at a $6 billion total network valuation. We have a governing council made up of blue-chip Fortune 500 companies including Deutsche Telekom, Nomura, and DLA Piper, and we have a network that’s live right now. There are 500 companies building on our technology, and our token should start to trade this summer.

Just thinking about the hedge fund world… How the hell did you decide to jump ship and leave it behind?

It’s a good question. The hedge fund industry can certainly be lucrative, but by no means does everyone do very well. We always read about the big successes, and there are a lot, but you don’t read about the funds that shut down, or the people that invest in their hedge fund businesses only to have them not work out. If your fund doesn’t do well, you can end up treading water for a long time. And that isn’t the worst case! 

I last worked with Crispin Odey in London. He had some good years and then a couple bad years. He was down over 50 percent from his peak, meaning that the fund had to be up 100 percent to earn any performance fee, and it was unlikely that he would be able to raise additional capital. He still managed billions and had a stable business, but it wasn’t going to grow. With respect to the entire hedge fund industry, the largest funds are growing and the barriers to entry continue to increase. 

So, if you are running a hedge fund or you are a founder or PM at a good-sized fund which is doing well– yes, that’s hard to leave. But that isn’t a very big universe these days. And if your fund or portfolio is in a hole, i.e. down 30 percent, getting out of that is very hard. You’re more likely to not be raising any capital, so if you don’t have a large capital base with a significant management fee, you’re looking at years and years before you do very well, and that is the best case. So instead, you are probably looking at a shrinking universe of others firms you can join. I left back in 2017, and returns haven’t gotten any better. 

You got out at a good time!

Yes. I started looking at Bitcoin back in 2013 as a way to move money and store value. At the time, it was priced at around $300, and I began paying much more attention to the ecosystem. I didn’t invest until a year or two later because I was trying to understand that entire world for a while.

Did your experiences at more traditional places like Goldman help you out?

The best training one can have out of college is undoubtedly working for an investment bank. I like to think of banking as the very core of capitalism: it’s about getting capital to productive opportunities. And that is the function that banks perform. On a very philosophical level, understanding how capital is raised and allocated or deployed is at the very core of how our economic system works.

On a day-to-day basis in an investment bank, you are interacting with very high level C-suite executives, your peers are very motivated and talented, and you are in the core piece of the economy. That experience is a great training ground for anything else you want to do. Banking and consulting are often viewed together, but I didn’t even look at consulting, because it fulfills a completely different function. You do work with high level executives as well, but you develop a very different skill set that I don’t think is nearly as vital to how capitalism or businesses function.

I’ve heard 2-5 years at an investment bank is a good call out of college, even if you want to go the startup route. Thoughts? 

Yes. If you have that core banking background, then startups can know where to place you, or what skills you have mastered. They’ll also assume a level of competence and credit you for a certain skill set. So, you can join a startup out of school–that’s great as well. But as soon as you leave the world of that specific company and those specific relationships, you’ll find it challenging to translate those skills to a different area. 

The update on my end is that I have left Hedera. I am working with our council members, investors and the community on several different opportunities, but it’s a very interesting time to leave given that our token is trading soon and that I was a core architect of the project. There are a lot of fascinating things to do in this space. 

Did you leave because of Libra?

Not because of Libra, but I do have a few thoughts on Libra. I think people are missing the fact that all the big chat companies have currencies: Telegram, WeChat, Alipay. And to be precise, I think Libra’s issue is not Libra itself, but the Libra-Facebook wallet, Calibra. Those two things are generally conflated. Libra can be created, and I see almost no way to prevent that. The issue is Facebook both owning the Calibra wallet and using the Libra coin within it. Facebook could have created a wallet and let people pay with any of a number of coins. They didn’t need to make their own.

The Calibra wallet on Facebook could be troubling given the privacy concerns, but preventing its development is a real challenge. If you’re trying to prevent it, are you saying that companies can’t distribute or integrate digital wallet software? Can Facebook create a wallet, or do you ban wallets period? Do you just ban the Calibra wallet? 

Answering these questions gets really hard. Do you want to disadvantage Facebook vs. the other chat apps? Because if that’s the case, competitors will soon have their own payment mechanisms anyways. How do you prevent other companies from creating wallets? Because I would expect Google, Amazon, Walmart and Netflix to create their own coins at some point, too.

Why haven’t those companies jumped on board yet?

I don’t know why Amazon hasn’t created their own coin yet, but imagine a scenario where you receive a 5-percent discount for buying on Amazon using their coin. To me, that’s a no-brainer, and I expect it to happen. On top of that, Amazon has far more reach than Facebook. Maybe not globally, but they certainly have more reach within the U.S. I think Amazon is waiting to see what happens with Libra before they dive into the space.

Here’s the other component worth saying. I believe that if Facebook had just made Libra a stablecoin based off the U.S. dollar, it would have caused a lot less controversy. One of the main aspects that riled government bureaucrats was the fact that Facebook planned to use a basket of currencies to create a currency of their own design. If they had said they were going to use JPM Coin, a USD stablecoin, or just the U.S. dollar, the U.S. government would have paid a lot less attention because it wouldn’t have presented an alternative to the U.S. dollar.

I think this controversy is about Facebook using a different currency. Imagine Amazon creating its own coin and pegging it to the U.S. dollar, eliminating transaction fees and giving customers a discount. How can regulators oppose that? Amazon must spend tens of billions in credit card fees to Visa, Mastercard, and other credit card companies. If they allowed transactions in a U.S.-dollar backed coin, they would eliminate those costs, pass a lot on to consumers, and would do so without a big part of government regulatory concern. The privacy concern still exists, especially for Facebook, and I think very rightly so, but that’s only one piece of the puzzle.

Do you foresee a world where all of these companies have their own coin?

How many coins do I have to hold, and what does that future look like? Do I have to hold 50 different coins? If yes, then a couple of those will eventually become dominant. But you will have wallets that are actually smart enough to tell you, automatically, which coin will be the best to use for every transaction. The wallet will do all the calculations. You go to buy something, and your wallet knows, “Okay, AmazonCoin– I get a $5 discount.” You may have to set some parameters initially, but presumably you won’t even know what coin you are using because the transaction will just happen automatically. It could be a while before Amazon announces a coin. Maybe that will be late 2020 or 2021, but I see it coming.

Wasn’t part of the problem that Facebook would accumulate interest on the reserve funds, keeping it to themselves rather than dispersing it to the Calibra wallet holders?

Correct– but it’s simpler. I don’t think Amazon would propose using a basket of global currencies. They would just digitize the U.S. dollar. Why? If I’m Amazon, I’m only worried about avoiding the Visa and Mastercard transaction fees. So, I’ll price in dollars. Maybe later I’ll digitize the euro or make a stablecoin, but it’s just too much of a hassle for consumers and companies to deal with these different currencies. That will just slow adoption. Facebook wants crypto in order to have a transaction element to their business. Amazon would do crypto just to save fees. They’ll want it to be used as much as possible and as quickly as possible. They’re solving a different problem.

We tried to get Facebook to join our governing council, and I set up and led our meeting with the Facebook team. They didn’t join, and then they came up with the Libra Association council. We think it’s heavily modeled after our governing council. Of course we can’t prove that they copied us, but I also have no insight that they came up with it independently. So, Hedera took out a full-page ad in the Wall Street Journal several weeks ago thanking Facebook for copying our governance model. Worth saying, however, is that they left out several key aspects, the most important of which is that Hedera members are term limited whereas the Libra members are not. That difference is hard to overstate. 

Everyone in the crypto community hates centralized companies; they hate anything that’s not completely decentralized. But the only thing they hate more than centralization is government involvement. Now you have this unusual dynamic where the community is annoyed with the government trying to exert influence, happy that Facebook is adding credibility to the industry, but also frustrated with Libra’s centralization: a conflicting basket of emotions. Even the whitepaper says, “We’re not decentralized, but somehow we’ll get there at some point.” The tech’s not interesting. It’s a thousand TPS that will slow with scale. There’s nothing novel or groundbreaking about what they’re doing from a technical perspective.

With regard to their council, their ‘members’ have only signed non-binding LOIs. The Hedera members have joined an LLC, they’re fully committed, and they’re currently governing. Additionally with Libra, the $10 million investment isn’t yet funded. Several of the announced members have previously raised only around $10 million in total funding for their entire company, but their investors are happy to jump in to fund the Libra membership because of how lucrative it could be. Facebook’s rationale is, “We need a payment mechanism. We have this massive scale, why don’t we have a payments mechanism? What’s an interesting way to do this?” But it is exactly their scale that puts them under the spotlight more.

Final thoughts?

If you read the press on Hedera, it is very lightly covered overall. The press coverage is hardly 10 percent of what it should be given the innovation level that’s been achieved. That lack of coverage is because it isn’t ‘proven’ at scale, doesn’t have a trading token, and also because it doesn’t have some of the very vocal investors behind it. Why not? Because it’s not a blockchain but rather a directed acyclic graph (DAG). Most investors spent all their time understanding blockchain and skipped completely over different architectures. It’s going to be a fascinating case study when Hedera’s claims are proven out. It will be fascinating to look back and see how people dismissed it. We raised a lot of money, but the market didn’t want to embrace or appreciate the level of this development.

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