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Apr
2nd
Wed
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More of the Same

Scot Patterson’s recent article on the FBI investigating high frequency trading firms had me giggling, which is especially painful right now due to a probable rib fracture.  

Scott writes:

The investigation, launched about a year ago, involves a range of trading activities and is still in its early stages, according to a senior FBI official and an agency spokesman. Among the activities being probed is whether high-speed firms are trading ahead of other investors based on information that other market participants can’t see.

Among the types of trading under scrutiny is the practice of placing a group of trades and then canceling them to create the false appearance of market activity. Such activity could be considered potential market manipulation by encouraging others to trade based on false orders.

I don’t know if HFT firms trade based on information that other market participants can’t see, but  they trade in advance of what other market participants won’t see, because others aren’t running servers inside the exchanges, or using laser networks to speed their access to quote data. This seems to be of sudden interest right now thanks to Michael Lewis’s new book, but its always been true.  There has always been someone looking at data faster and responding faster than the other guy.

Sometimes this may be because they get an insider tip, or are looking at something that legally or morally they shouldn’t.  

Most of the time its because they have faster computers and data feeds.  Can’t wait to Read Lewis’s new book, but HFTs are not the cause,  just the symptom of messed up market structure that doesn’t work for us regular people.  

But why am I writing this?

Scot’s two paragraphs have little to do with each other.  Day-trading firms and their hyperactive cousins the HFT firms, often send in multiple orders at different prices to different market centers or the same ones in their hunt for executions.  Sometimes this comes from a single algorithm or “investment decision”, more likely it comes from multiple investment decisions happening at the same firm.  Its a natural side effect of  our market are structure.  It could be a sign of fraudulent activity, but it should often happen for perfectly legitimate.  What seems like nonsense after the fact makes perfect sense when you are on the trading floor during the day. 

Back when I was unfortunate enough to have to work with the SEC and the FBI, every time they thought something was fraud, it wasn’t, and when I found customer behavior that matched their definition of fraud, and mine as well, they did absolutely nothing. 

Oh yes, I called the FBI more than once when some supposed Russian hackers were using  compromised  accounts across multiple online brokerage firms to manipulate some low-volume stocks.  It was a very smart scam that I tracked over multiple campaigns and lasted for over a year before I shutdown the honey-potted accounts they were using.  I was unable to get the FBI or any regulatory agency to do anything about it.  I couldn’t even get them to understand it.  

The regulatory perception of how stock trading worked was too disconnected from reality, and I never found an agent who cared enough to close that gap.

Good luck, FBI, but try to keep it real. Stock trading in today’s world is a messy, complicated business.   

Jan
24th
Fri
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A Pilot in the Cockpit is like a Fish with a Backpack. Filled with Dynamite

Unmanned Aerial Vehicles, or UAVs, otherwise known as “flying robots” have been around for decades.  Recently, the FAA selected six test sites to  study how UAVs might one day operate in controlled airspace, as in places other than Afghanistan or Yemen. 

http://pstern.me/1ckIl8M

This is a big deal.  Ten years ago I tried to sell some UAVs to the NYPD.   I felt badly for their helicopter pilots, who spend a lot of time hovering in one place, keeping an camera pointed at an accident or crime scene. Hovering in one place is is tricky and rather fuel inefficient, and if all you need to do is aim a camera, its a task better left to a $10K 40 lb robot, not a 4000 lb block of aluminum that costs thousands of dollars an hour to operate.  Personally, I would prefer a nearly silent robot hovering thousands of feet overhead rather than a giant, loud heli. My personal tastes turned out to be irrelevant in this station, as my ideas was completely illegal.  FAA rules did not allow to operate outside of military test sites. 

Now that the FAA is starting the process to make this idea and many other ideas, we are in for loads of fun. 

Its hard to take the fun out of flying robots, there is nothing cooler than flying robots, but the FAA is really good at taking the fun out of a lot of things. Air traffic control is not allowed to talk to UAVs - I was so excited to hear what they sounded like on the radio!  All UAVs must have a designated pilot, and a pilot only gets to “fly”, or be responsible for, one UAV at a time.  The whole point of UAVs is that they fly themselves, you don’t need a pilot at all, and certainly you should be able to get away with one pilot for a cloud of them.  

I am sure the FAA will get there, given another decade or so. Eventually the FAA will have to create an entire new class of airman, “UAV operator” or something like that. 90% of what I had to learn for my pilot’s license is simply irrelevant for someone who “flys” a UAV. 

The FAA’s  roadmap is a little bit hazy on the topic of Optionally Piloted Aircraft, or planes that have room for people but don’t need a pilot. This ambiguity is a bummer, because what I want to build is an aircraft that is manned, but not piloted. Maybe it has a supervisor in a ground station, but not an actual hands-on-the-stick pilot.  If you get rid of the pilot and all his or her equipment, you could make a flying vehicle that can move people around cheaper and more reliably than if the pilot is stuck in there with the passengers. The UAVs that have been flying for decades are amazingly reliable machines, if you don’t fly them places where they get shot at, and even then they do an amazing job at flying. Its time to use that technology for something more productive than firing rockets at people.  How about getting me from midtown to JFK during rush hour?  

Like tomatoes, microwave ovens, elevators, and power steering, it might take some time for people to become comfortable with the idea, but climbing into an automated, un-piloted plane, helicopter, or quadracopter will be a lot safer than what we do today.  For every heroic Sulley-esque story, where a talented pilot saves people from an unexpected technical failure, there are about 90 stories from the NTSB (http://pstern.me/1dp0WFq) where a crew makes a series of avoidable mistakes and flies a perfectly good aircraft into the ground. Soon, taking the pilot out of the aircraft reduces cost and increases reliability.

I trust well-designed, well-tested software more than I trust people in action.  I remember the first time I rode in an autonomous train, in the brand new Pittsburgh airport.  It was terrifying. “This won’t last, it will drive into the terminal when its gets dust on a sensor and that will be that…”  

It might sound silly, but that’s how people felt about automated elevators once upon a time, too. Its been twenty years, back and forth, hundreds of times a day, and that robot train  hasn’t ever gotten distracted on a phone call,  stoned while on the job,  felt the need to drive too fast just for fun, or any of the things that cause  train crashes.  Having a human driving a train is pure folly. Someday, people will realize having a pilot in an aircraft with the passengers is as silly as having a person drive an elevator.  

The FAA roadmap does not specifically cover  regs for NPMVs, Non-piloted Manned Vehicles. Not yet.  It will happen, though, but probably not by the next time I need to get to JFK during rush hour. The only real decision to make is, if you talk to a UAV on the radio, what will it sound like? 

Dec
6th
Fri
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Still Waiting for the Internet of Things

I have been holding my breath waiting for the Internet of Things ever since 2006, when I stopped working on Zigbee-based home monitoring and security to pursue other projects.

I bought a SmartThings kit with eager anticipation! It even looks like my mocks from 2006! Physically, its beautiful! the packaging is gorgeous. the UX on the software looks lovely.

But it doesn’t actually work. The UX functions poorly, the sensors don’t work, and the app structure can’t support at least a few obvious functions without me having to write my own code.

Finally got around to installing a Nest thermostat, which is great product in every direction except price, so I can at least take a half breath, but I am still waiting….

Nov
18th
Mon
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Seven Pitfalls for Entrepreneurs and How to Avoid Them

I moved to NYC twenty years ago to create a company around a new idea, something  audacious, and I had no reason to think it would result in anything other than life-crushing failure.  Despite everything we did wrong and a healthy dose of bad luck, it worked out rather  well.  We changed the world for the better, or so it seemed at the time, and made some money doing it. 

Rather than use that success to migrate into larger, bolder opportunities I instead continued on the highly irrational path of  creating, investing in, and working with startups.   I have been a founding executive, a non-founding executive, been coerced onto boards, and mentored hundreds of wonderful and not-so-wonderful entrepreneurs. 

The odds are stacked against people who want to create value out of nothing, who want to do something new, who see how the world could work a little differently, a little better, and are willing to get off the couch and make it happen. 

Its not easy, it never has been, and it likely never will be, yet I admire the fools who try. 

I recently gave a talk in Istanbul where I tried to summarize everything I have learned through countless mistakes over 20 years of experience.  After working with hundreds of companies, you learn to spot the patterns of failure pretty quickly. Lots of pundits pontificate on this topic.  For this talk, though, I thought I only had 5 minutes, for an audience of non-English native speakers.  I had to be pithy, and I wanted to describe  actionable solutions applicable to everyone. What problems do i find with the largest number of  entrepreneurs, and how can they avoid them? 

This is what I came up with.  Its nothing original.  I have made most of these mistakes myself at some point or another. While I was forced to identify these mistakes and find solutions in relative isolation,  many industry pundits have elaborated on these points before.  Stacks of books are dedicated to some of these topics.  Even so, its surprising how often i find myself being the first to mention these pitfalls and offer solutions.

Pitfall #1  You Think You Know

Ignorance is dangerous and costly, but much less so than knowing something that is untrue.  When doctors misdiagnose and treat the wrong disease, or when entrepreneurs proceed on a path out of conviction rather than evidence, its mostly a disaster.

I disagree with the popular myth of the entrepreneur as a fearless risk taker ignoring naysayers to persue their dream. Successful  entreprenuers I work with have a detailed and perhaps unique understanding of a real problem, gained from answering structured questions with real data, from real customers. 

How can you be sure you are not making up your own truth?  The solution that has been working for civilization for quite awhile now is to apply the Scientific Method.  Create a question, run an experiment, and reach a conclusion.  Whether your idea involves, software, hardware, mobile, physical goods, its never been easier to collect real information.  Run leadgen campaigns on Facebook or Kickstarter to see if anyone cares about your product or service.  Buy people some coffee and interview strangers. Run Google adword campaigns to test messaging and find target audiences.  Print a physical mockup on your Makerbot and hand it to people at a park, video all their reactions on your smartphone. 

Once you are open to collecting objective  evidence to support your idea and plans, you are on the right path. Or at least a better path. 

Pitfall #2: The Idea is Everything

This is just wrong.  Ideas are necessary, but hardly sufficient. Believing the idea is more valuable than it is leads to silly behavior and replacing solid planning with wishful thinking.  For every great company there were countless people with that basic idea.  Most people never did anything about it, and a few more messed it up in the details. 

A figure I have heard from investors who focus on specific industries, like drugs or medical devices, cite 5% as the maximum value of the idea relative to all the costs that go into creating a successful exit.  5%.  That’s it.    So get over your great idea and move on to making it happen. 

Pitfall #3: Product is Everything

I encounter plenty of teams feverishly working on a product, thinking that if they build a great product and launch it, everything else will fall into place.  Its easy to understand why. After all, product development is more fun than a lot of other things you might have to do, and this does seem to work sometimes.

I also see plenty of teams launch, and then fail anyway.  A lot of that failure might be avoidable if they had simply approached the problem a little differently.

Before you work on your great product why not take the time to answer a few questions first.  For whom is your product intended?  How do you reach them?  What does it cost to acquire those customers? When and how do you extract value? How much? 

In his book "Disciplined Entrepreneurship" Bill Aulet proposes 24 steps to creating a startup.  Describing the minimal viable product, just describing it, is step 22.  Rounding that, its the last 10% of what to do as you are getting started.

No matter how little time you think it takes to make a great product, surely answering and validating the answers to a few questions will take a lot less time?  

Pitfall #4: The Founder is the Typical User

It sounds crazy, but I meet plenty of companies where the founder makes all product decisions.  I used to be that founder, so I can tell you from first-hand experience, its horrible to work with people like that.  Its demoralizing for the product team, creating a product for simply one user in the office, unable to add value without talking to that one person.  Product decisions become highly charged personal arguments between team members, and the results are based on who screams loudest. Its even less helpful to the marketing or sales team, trying to implement plans to reach the one user for whom the product was designed, who already knows about the product.  

The solution is product design based on User Personas. User Personass or User-centric design was thought up decades ago by one of my heroes, Alan Cooper.  You can buy books about this.  Its the single most valuable idea I remind people about. 

Simply, you make up a structured story describing different types of users, or sometimes even non-users.  Focus on describing a user’s goals, wants, needs, capabilities, fears, motivations, and where they find solutions.  You can either make up the description and then try to validate your guesses with real evidence from surveys, focus groups, etc… or extract the descriptions from interviewing potential users. There is a healthy debate about the best way to do this, but trying out any User Persona methodology is vastly better than not. 

Getting User Personas right takes some practice.  They do not work if they are too vague, or too specific. They need a certain amount of detail, but not too much.  They need names, too. You know you have them right when you hear your product team saying “Lilly would love a feature that does…” and your marketing team saying, “William would respond to messaging that says…”  Most importantly, user personas take a lot of the emotion out of feature discussions, leading to better product decisions. 

Pitfall #5: Can’t Clearly Describe the Product

I have come across plenty of startups with employees, maybe even multiple rounds of funding, where the founders can’t clearly describe what they are building. Oh, plenty of words come out of their mouths, they can talk for minutes or hours about what they are doing, but when they are finished I still have no idea what they are trying to build, for whom, or why. 

I have been there myself. Sometimes, the closer your are to something, the more difficult it is to extract the parts of your idea that are really valuable to others. What is interesting to you as a creator may not be what is most interesting to others. 

The solution is to understand the difference between “grabbers” and “holders”.  

A “grabber” is an idea or feature that brings a new user to your product. 

A “holder” is something that keeps them happy after they use it. 

Take everything you want to say about your product.  Write them as bullet points.  Now, classify them as “grabbers” or “holders.”

Grabbers are things that somebody needs done or wants to do, like “rent a car for an hour” or “reduce your energy bill” or “Get takeout delivered to you house without talking on the phone.”

While they may be interesting or even vital, holders are not something anybody wants in isolation. Holders might be “intuitive design” or “works from Android and IOS” or “lowest cost.”  None of these  are important until you first grab me with why anyone cares about what you are doing in the first place. 

Never talk about holders outside the company. Ever. Founders love to focus on holders, but outside the company, nobody cares. Focus on the grabbers.  

Pitfall #6: Financial Plans Based on Events, Not Goals

Sometimes its funny how disconnected entrepreneurs and investors can be.   

Founders tend to think of goals as events, like a launch or hiring a team.  Investors don’t care about goals like these. Founder-type goals are  just a means to the end, the end being to make investors more money.  

Wouldn’t it be better to make money without  betting on industries or products or teams and stop reading pitch decks all day?  Of course it would!  Early stage investors decided that the best way to make money is to invest in startups, obviously, but their goals for your company can be defined by metrics, like attracting users, achieving a substantial growth rate,  revenue growth, or some measure of, or proxy for, value creation.  

Plenty of startups make it to launch but then struggle to validate any investor-type goals just as they are running out of money.  They are then stuck raising money after most of the hard work has been done, and exactly when they have the least to show for it.  Not good for the founders and easily avoidable with better planning. 

Shockingly, many startups don’t even think about their goals post-launch.  If you ask them, “after you launch, what does success look like?” they can’t even answer the question.  Sometimes things just work out better than you ever could have expected, and this line of thinking would be a waste of time.  For the rest of us, the 99.995% for whom immediate runaway success is not the outcome, defining what we want to accomplish is absolutely vital in helping us figure out how to accomplish it. 

Do you have the resources, ie. money,  to get to launch and still have funding to get past that validation phase, and then raise more money?  If not, can you get to launch faster?  Strip down your minimal product?  Or maybe you can test value creation without a product at all, with a leadgen marketing or Indigogo campaign?

Another way to approach this is to create your next pitch deck. Imagine what you would be telling potential investors as you enter your next fundraising cycle. What have you accomplished?  How have you measured that?   What are you going to do next, and how do you measure that? 

Run it past your investor friends or your existing investors. If that pitch deck were true, would they want to invest (more)?  If not, maybe its time to rethink your goals and how you are measuring them.  

( Reid Hoffman recently published a better written and more thoughtful article on this idea: http://reidhoffman.org/linkedin-pitch-to-greylock/


Pitfall #7: Lack of Focus

Startups are hard.  Really hard.  At every step of the way they just get harder. 

Startups are chaotic, too, and its easy to get distracted. Its difficult to decide what is important.  Getting distracted from the important goals, though, will make everything that much harder, and will waste time and money that startups never have. 

When I sit down with an entrepreneur, I can often find about a third of their work that does not  yield any results that they care about. You lose perspective when you are in the thick of it. 

So how do you avoid this pitfall? It sounds easy, it will make sense, and you will be surprised at how difficult this is.  

Rank order the goals you think are important (its also a good idea to write down how you measure the success of your goals). Cut off the bottom quarter.  Then make sure everything you do is justified by your list of goals. 

So there you have it, all the wisdom from 20 years of painful mistakes  in less than five minutes.  Some people asked, “did this apply to Instagram?  Tumblr? Snapchat? Wouldn’t those guys be wasting their time worrying about these pitfalls?”  Maybe, maybe not, but that’s missing the point. These pitfalls are trapping plenty of companies that are failing but could succeed if they got out of their pit.  They will probably fail anyway, that’s how it goes for startups, but getting out these pits will at least make the effort more fun.  And no offense, if you knew how to create an Instagram-like exit, you are wasting your time listening to me, so I am assuming my audience is in the user persona of “people who do not know how to create with certainty the next Instagram-like success story.”

I probably said this better live, but at least you didn’t have to travel to Istanbul to hear any of this. You should go sometime. Its a great city.  Just don’t go there to listen to me. 





Oct
21st
Mon
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Sensor Networks Everywhere yet Not a Drop to Drink

I have been hearing about the Internet of Things and its cousin buzzwords since the ’80s.  It still hasn’t happened, although it does seem to be getting closer.  My car is now a thing on the internet, but unlike my espresso maker and light switches (which are also things that you could have found on the Internet at one time or another), my car is a sensor platform that moves around.  

My car is capable of generating so much useful information and sharing it at such low cost, its frightening.  Its speed and location are a terrific indication of traffic, but that’s already been done (and I bet Google is already getting that data from my car anyway, without me even knowing about it) . How about temperature? Would knowing surface temperature at potentially millions of locations instead of a few thousand improve national weather forecasting?  

Why stop at cars?  Maybe this is already happening, but what about aircraft?  Commercial and general aviation aircraft are also packed with sensors.  Air temperature at some specific altitude, air pressure, GPS location, wind direction, and even turbulence can be directly read or easily inferred from almost every airplane.  While the capacity to share this data is not as inexpensive as it is on my car, its been possible for decades.  Every few years someone new tries it, and finds that its still just a but too tricky to make it work.

So I was doubly disappointed when I read that budget cuts at the FAA had derailed its digital radio efforts for the Nth time. If you have ever listened to air traffic control you realize how absurd the current system is.  Don’t panic, it works incredibly well, its robust, self-correcting, and has fairly wide room for error.  Yet instead of listening for my tail number and struggling to slip in my request or echo my last instructions, I would love to simply get a text message to my plane, which i could acknowledge with a button. 

A side effect of digital radio would be a seamless and low-cost way to to turn every plane in controlled airspace into a weather station.  A series of weather stations, actually, on a predictable route.  I doubt this offered any value in the FAAs decision-making process. 

Of course, you could do this right now, far more cheaply than what the FAA may end up doing,  at least for any aircraft wired for in-flight internet.  That has to be worth something, right?  

Apparently not so much, or it would already be done.   I don’t think the barrier to the Internet of Things is on the cost side. Maybe it used to be, but I have seen costs fall by two orders of magnitude in two decades.  There is not much more room for cost to fall. 

 I think the barrier is on the value side.  We need to create value out of Things on the Internet that is larger, much larger, than the cost of people deploying the things.  Google’s acquisition of Waze is one example.  Is there a way for Nest to get so much value from my thermostat data that they will pay me to install one?  Can someone create so much value from atmospheric data that they can pay GoGo to install an aircraft interconnect or some independent sensors? That is when you will see the Internet of Things truly take off. 

Is this stuff all happening already and I just can’t find out about it? Maybe. I don’t look very hard. In the meantime, i will simply wire up my espresso maker up to the Internet again and hope that someone can extract value from it this time….

Sep
10th
Tue
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Is OFEF the Best Way to Fund Your Startup?

CMU’s Open Field Entrepreneur Fund, otherwise known as OFEF,  was conceived as a way to help erstwhile entrepreneurs at CMU.  Jon Kaplan and I felt that CMU had great students, fostered incredible ideas, but lacked the startup ecosystem found in the vicinity of MIT, Stanford, and other top business and engineering schools. We  felt that  CMU alumni could achieve more, for themselves, for the economy, and for society, through their own efforts rather than “just getting a job.”   How could we foster that?  Jon felt that by adding to the pool of investment opportunities associated with CMU innovators, more startups might be fostered by CMU alumni.  So Jon raised some money and created OFEF. 

The idea behind OFEF is simple: create an evergreen fund that invests in startups that are founded by CMU alumni, and create a network of mentor-alumni to help these startups.

Of course, every simple idea gets complicated once you start implementing it. What is the definition of “founded by”?  The answer is too complicated to put here.  Who is eligible? Answer:  someone who received a degree from CMU within the last 5 years.  You also need to demonstrate that you can execute your idea (full-time commitment, ability to create a cogent plan, etc…) and raise some matching funds from an entity other than OFEF.  

Unlike a VC or anything else I have heard of called a “fund”, OFEF does not exclude applicants based on  ideas, market size, investment appeal, or the like.  You must create a potentially profit-yielding entity, something that is incorporated. Non-profits are not eligible, nor are real-estate holding companies, etc… You can’t be trying to break any physical laws, but other than perpetual motion machines or Feynman ratchets anything goes.  Laser toothbrush?  Sure. Backyard bone-mapping software for dog owners?  Probably. Drug delivery via mosquitos?  You bet. 

We want to help you with a bit of entrepreneur-friendly seed financing. Making the idea work is your problem. 

From the beginning we needed to create an investment mechanism that matched OFEF’s purpose.  Simple, low-cost financing that set the applicant on the best trajectory for success. We decided to use a fairly standard convertible note, widely used by early stage investors.  A convertible note is simple a loan that converts into stock at some point in the future. It offers the investor no control, and there is no need to discuss the value of the investment, as that is determined at the time of conversion.  I recommend  Feld/Mendelson’s book “Venture Deals" for anyone wishing to understand how all this investment stuff works.  They took the time to write down everything that I had to learn the hard way.  They offer some thoughtful pros and cons on convertible notes.  Brian Cohen is passionately against convertible notes, as I learned on a recent car ride through the Holland Tunnel at rush hour, but I have yet to read his book "What Every Angel Investor Wants You to Know"

If you decide convertible notes are not for your, then unfortunately OFEF is not for you either.  I personally have found convertible notes extremely beneficial for both my angel portfolio and my own startups. For reason obvious and not-so-obvious, all OFEF companies have to use the same convertible note. 

The OFEF note has some  particulars that may or may not be right for your startup.  We want every OFEF applicant to understand how this investment works before you apply. So, assuming you have already read Venture Deals, let me explain some details you should think about:

Timing:  You need to have a plan for where your company will be in a year. We want you to move fast. We want you to be working hard to get your startup to the next level within a year, so OFEF has the option of converting the note in one year.  This means that you should plan on having a conversion event, i.e., a larger funding event at a specific price, in the time frame.  If you don’t have some other fund-raising event, OFEF can convert the note into common stock of your company, taking 5% for its initial $50K. This implies that after one year, your company has a value of $1 million dollars, which leads us to the next detail…

Evaluation: if after one year  nothing has happened on the fundraising front, the OFEF note implies your company is worth one million dollars. Depending on what you are working, on this might be desirable. Many early-stage tech ventures, however, strive to be worth  more than that in a year, as incredible as that may sound, and a million dollar implied cap is too low. Some founders feel this will impair their ability to fundraise after a year.  This idea is debatable, but I already gave you some reading  to convey the debate. OFEF is not going to negotiate the value of your new company.  If you are the next big thing, and your company will be worth billions by next year, that is wonderful, and OFEF is not right for you.  Understand this, though: we want you to raise money at a higher evaluation than the implied value in the OFEF note. OFEF is just a start.  Our $50k is not going to get a serious venture very far.    We want you to take our $50k, match it with someone else’s $50k, and get started creating something that is so fabulous that serious investors are crushing your desk with piles of term sheets in a quarter or two. Or, to pick a more modern metaphor, crashing your mail server. If that doesn’t happen, though, OFEF may own 5% of your company and create an implied evaluation of your company. 

Control: Unlike many venture capital deals, OFEF does not want any control of your startup.  We would like to give you access to our mentor network, we want to help you, but we do not want to be on your board, or to hold  voting stock. If you ask us to be on your board we will decline.  We won’t even offer advice on who should be on your board.  However, we do think you should have a board, and that your board should not just be you and your co-founders, but include at least one outsider, i.e. someone who doesn’t work at your startup. In the OFEF note there is a requirement that within 60 days you will form a board with at least one outsider.  For first-time entrepreneurs, forming a real board sounds intimidating, but it is simply invaluable.  Serial entrepreneurs already have a board before they even apply, so this is never a concern for them. If you are serious enough to think about applying for OFEF, you should already be thinking about who you want on your board. 

We created OFEF to be the most entrepreneur-friendly fundraising experience possible, and I think we have succeeded. It sure beats any fundraising Jon or I have ever done. Its not perfect for everyone, and we want everyone to make the best decision from their own perspective. 

If you are a CMU alum, having received a degree within the last 5 years, and you have been dreaming of creating a startup, consider applying for OFEF. We look forward to your application! 

Jun
7th
Fri
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What’s Wrong with the Tesla Model S?

I knew  a car designed by a bunch of Palo Alto engineers was going to have some problems.  I wanted to believe in Tesla, I really did, but in my heart I knew that the kind of engineers you would hire to design a car in Palo Alto would be too smart, think the world too perfect a place, be lulled into design complacency by thinking the world everywhere is just like Palo Alto, and people everywhere are smart just like them. 

 I knew the Tesla was not designed for a gritty reality, for people without garages or driveways, with kids and dogs, driving on the FDR Parkway, the Long Island Expressway, or the BQE during rush hour, in a furious East coast downpour. 

I knew the Tesla Model S was not designed for me. 

I went ahead and bought one anyway. 

So when I drove my Model S on the Long Island Expressway during a simply awful downpour, with my kids and the dog, I expected the worst. I expected the motors to break, the steering to crash us into a wall, Chinese hackers to open the doors, hood, and trunk while accelerating the car off the road,  the battery compartment to flood, for the entire car to burst into a bright blue lithium fire, or perhaps something worse. 

Despite my certainty that  death awaited us at any moment, I did not take it easy. I drove fast, but that’s not that hard, the car wants to go fast. The kids, maybe even the dog, like the sudden, silent acceleration from those motors.  I certainly do, and I think about what a wonderful control problem those Tesla engineers solved, to keep those motors behaving like a real car,  during acceleration, into a turn,  without any mechanical linkage. 

I drove through some deep standing  puddles, but that’s not hard either, considering how Long Island roads flood during a heavy storm. 

All along, I waited for the car to burst into flames, or worse. 

And I did indeed find  something wrong with Tesla, something horribly wrong, exactly the kind of thing you would expect from smarty-pants engineers designing a car for the perfect sunny streets of Palo Alto. 

No, the Tesla did not burst into flames, but it might as well have. 

The wind shield wiper controller!  It has exactly four settings, four discrete non-adjustable settings. No matter the amount of rain, no matter how fast you go, none of these four settings is quite right.  I found myself flipping between wind shield wiper speeds till I had blisters on my fingertips, and still felt like the visibility was not quite perfect. 

"Oh Elon, why couldn’t you just make this a continuous, variable control?" I wailed, frightening the kids, maybe the dog. "Don’t you have rain in Palo Alto?"

Of course they don’t have rain in Palo Alto.  Maybe once every five years they have real rain in Palo Alto. 

So there you have it, the big problem with the Tesla Model S.  Not the control systems, not having to recharge your car, not the lack of supercharger stations between NYC and San Fran ( because really, who needs that?) No, the big problem is that you can’t quite get the windshield wipers to swipe at the exact speed you want. 

I would add that at high speed, the wipers make a lot of noise. Or seem to.  Maybe its just that there no engine noise so you notice it more. 

Otherwise, the Model S is freaking awesome. 

As to the rain, well, I used to drive a car with NO windshield wipers. Its not a big deal.  Just get some Rain-X. 

Oct
3rd
Wed
permalink

Wanted: Computer Hackers at the SEC

The Securities Exchange Commission (SEC)  recently announced a new rule to help them to better monitor stock trading.  The new rule, Rule 613, will require stock markets to track orders more precisely than they do now, in real-time, with the hope that this will enable the SEC to maintain more orderly markets. 

The markets have been anything but orderly lately. Everyone has heard about the absurd glitch during the Facebook IPO, which essentially destroyed hundred of millions of dollars of somebody’s money.  What you might not have heard is that every few months some piece of software at a trading firm goes haywire and pumps out thousands or hundreds of thousands of unintentional stock trades before anyone notices, with disastrous results for the firm, the stock market, and, ultimately, all of us. 

Its difficult to find something less interesting to talk about than an SEC rule, but if you want to understand why the markets are the way they are, and what could be done to stabilize them, it is the best place to start.  Stable stock markets help us, and unstable, chaotic stock markets hurt us. All of us. I am not trying to convince you that a strong stock market helps everyone.  I am not sure it does.  But an unstable stock market that impairs companies’ ability to operate and scares investors from investing in the US only hurts our economy, makes it harder for you to get a job or get that raise, or save enough money against inflation for retirement.  Even if you have never invested a dollar in any stock, even if you don’t have a 401K or a 529 or any kind of investment at all, not even a checking account, bad markets are bad for you.  Do not think you are safe because you feel far from Wall Street.  Sorry, dear reader, what happens on Wall Street matters to you more than you know. 

The SEC’s work towards a more stable, more understandable stock market matters to all of us, and let’s give them credit: they have done at least an OK job since they started, during The Great Depression. At the very least we have not had another Great Depression. 

Stock markets are changing, though, and are creating a new set of challenges for the SEC. For starters, the SEC is geared up to be a watchdog for people.  The SEC regulates people.  It creates rules for people, and then monitors people to make sure they are following the rules.  

Stock markets have been heavily people-centric long after you would think. For a long time, all those terminals and displays you saw on the B roll on nightly news simply connected people.  Technology let more people trade with each other faster and from farther away.  Those traders working those terminals  were using a trader’s equivalent of instant messenger instead of all shouting at each other under a buttonwood tree or calling each other on the telephone.  Trading was still slow and manageable by rules designed to regulate people because people still had to connect to execute a trade.

By the late 90’s, though, the infrastructure was in place for computers to trade directly with each other. More than ten years later, the vast majority of equity trading activity is between computers, software, algorithms, operating in real-time, trading orders of magnitude faster than any person could ever deal with.  Even when people are directly involved, they are still trading with computers, and can enter massive order strategies with a single keystroke. 

I don’t think this is necessarily bad. I am not prejudiced, or a Luddite. In fact, I worked hard to bring this all about. What two consenting computer algorithms want to do, or what  consenting adults wants to do with a trading algorithm is none of my business, as long they follow the rules, and as long as we have good rules that ensure stock markets are enabling a common good. When an algorithm goes haywire, or, more specifically, when a trading firm empowers an  algorithm to destabilize the entire US equities market, causing trillions in paper gains to disappear in minutes, that is helping no one. Practically no one: I am sure there were some crafty short-trading bots taking advantage of the situation. 

Computer driven stock markets have the the capacity to create problems orders of magnitude faster and larger than the SEC can cope with. Months after the Flash Crash of 2010, the SEC was still unable to understand what caused that meltdown. Its still a mystery. Rule 613 is an effort to get a handle on these problems.

Rule 613 is a nice idea,  but it doesn’t go far enough. Like earlier iterations of this rule, it will fail to fulfill expectations because the SEC does not understand how to create rules that work for computers. They write rules as if they are regulating humans.  The Flash Crash was not caused by humans, not directly, nor was the the recent collapse of Knight Trimark.  The SEC needs to understand they are not regulating humans. They are regulating computers. Or worse, computer programmers.  

As a computer programmer,  I created the first service that let regular people, i.e. non-professional or “retail” traders,  trade directly with the stock market from anywhere on the web.  When I first started doing this in 1996, the stock market was made up of  ”market makers” or  ”specialists”,  human traders whose job it was to buy and sell stocks all day long. My customers entered orders through a website into what would be now called a “bot” or an “algo”, that then did its best to out-trade those market makers or specialists.  There were people involved, just not at our firm, only over at the stock market.  Shortly afterwards, we created a fully automated system that let regular people trade with each other without needing a stock market at all, just an algorithm that mindlessly matched up trades, more quickly and more fairly than any human. That algorithm eventually became the heart of NASDAQ, as well as the heart of many other electronic markets.  It didn’t take long before smart firms started replacing their traders with algorithms as well. Algorithms never get stuck in traffic, never have to go to bathroom, and never ask for a raise. 

To let people trade directly with the stock market I had to automate pretty much every rule the SEC and the stock markets had ever written involving stock trading.  Going through that process made it painfully clear the rule-writers had never thought about how a computer, or a computer programmer, might try to automate this stuff.  

Let me see if I can clarify with a few small examples. One rule defining how frequently a particularly effective trading system could be used by an individual specified a “one trade every few minutes” limitation, the idea being that this system was intended for small traders who should not trade that much or that often. Its an odd restriction to explain now, and it was equally odd back then, but its interesting how woefully incomplete the rule was to a computer programmer.  What about orders entered when the markets were closed, like on weekend?  Websites are always open, even if the stock markets are not. Did this rule apply then?  What if a customer entered an order on the weekend, then cancelled it, and then entered another one, even though the first order never went anywhere because markets are closed on the weekend?  

Asking for clarification got you nowhere, because the way the SEC and other stock market regulating organizations like NASDR liked to play was, “you do your own thing and we reserve the right to punish you later if we decide you got it wrong.”  Not wanting any trouble with Mary Shapiro, then head of NASDR who oversaw this rule, now the head of the SEC, I assumed the most pessimistic, risk adverse answer every time, i.e., “yes, the rule counts on the weekend even if that makes no sense.” 

Many of the SEC’s rules made no sense when viewed during the trading day, as if the writers of the rules only experienced the world when stock markets were closed. There were some interesting rules regarding how much a client could borrow from a brokerage firm to trade with based on the prices of the stocks in their portfolio. If the price of a stock dropped below $5, you couldn’t borrow against it. The amount you could borrow was based on the value of the position. If a stock in your portfolio hovered around $5, you would have lots of money to trade with, then have none, then lots, then none or worse, be in default because you borrowed too much. These rules were especially idiotic, from a real-time algorithmic perspective, because the definition of “stock price” was nowhere to be found. In a continuous market like NASDAQ or the NYSE, there is the price you can sell at (the offer or ask), the price you can buy at (bid), and that’s it. Two numbers, for every stock, whenever there is trading going on. There is something called a “last trade price” which only makes sense at the end of the day- its too noisy during the trading day to be of much use for anything important.  Last trade price jumps around as firms enter trades hours after they are executed, and it had little connection to the actual price you could buy or sell a stock at (although other rules have improved this somewhat in recent years). Nowhere was the definition of “price” given, and conversations with the regulators taught me that they lived in a simpler world than mine. The rule-makers never conceived of a real-time, fully automated world, just as I never conceived of anything but that. 

As far as I knew, I was alone in connecting a dentist in New Rochelle, and several million people like him, directly to the first automated stock exchanges over the web.  I was alone, and terrified.  What if something went wrong?  How would I know what happened, and how would I defend my firm to the NASDR or the SEC if they decided that what we were doing was somehow inappropriate? We thought we were helping the individual investor trade effectively against professionals who had the odds and the rules stacked in their favor, but we knew that the SEC or the regulators at the exchanges, hired by those same professionals, might have a different view. 

Out of fear,  I built a system that kept track of every single order a customer entered,  every single trading decision my algorithms made, every single piece of data needed to make those decisions, as well as every single trade that we ever created, cancelled, or  fulfilled. In real-time.  This knowledge was instantly accessible by anyone at our firm, even while the trades were being processed.  It required more hard drive space in a day than all the other data we generated in a month, and it was worth it. 

It answered every question regulators ever asked us about any customer order, and more importantly, it answered our own questions about what was going on with our customers’ orders.  If a customer called to ask about an order, we could tell them exactly what was going on. We could not have stayed in business without this system. 

Years after I had created this real-time order tracking system and my firm had grown to be one the largest retail brokerage companies on the planet,  the SEC mandated an industry-wide order tracking system whose acronym was OATS.  This is the predecessor of whatever will be created by Rule 613, and I think its still in use today. This system, implemented across every firm at much expense, was a near-total failure. I am fairly certain it never answered any useful questions for at least the first few years of its operation, because I would frequently get calls from regulators to answer questions that could have been answered by the simplest queries on the data that  OATS was supposed to collect.  Regulators would routinely contact firms to collect trading data for their investigations, even though OATS mandated that it should already be on the CD-ROMS, DVDs, or data tapes in a closet somewhere at the NASDR or the SEC. Of course, firms that had something to hide had an incentive to produce poor OATS data, and it didn’t seem like anyone was ever checking those CD-ROMS anyway. 

OATS was a failure because it collected a small fraction of the data a regulator would need to answer real questions, it asked for the data in a format that made it almost unusable, and mostly because no one ever validated the data to see if it was even remotely accurate. OATS was like making a backup for your computer but never checking to see if you wrote anything to your backup drive, or even if you could connect the backup drive to your computer - yes, my analogy needs some work, but that show broken OATS was from a computer programmer perspective. 

The SEC realizes they need to get a handle on this big data problem, which is why they passed Rule 613 which calls for  stock markets to create the next OATS.  The problem is that Rule 613 does not go far enough, and is likely to result in a system as useless for solving these problems as OATs was or is. While the SEC might want to solve this problem, the trading firms don’t, and they will hem and haw and say how hard it is for them to do the simplest things, even as they spend millions of dollars to make their trading algorithms go a few microseconds faster.  

Rule 613 does not call for, or provides generous exceptions for, many of the features that made my system so effective.  My Rule 613 analog was created by just a single average programmer (me ) in a few weeks, on 1990’s technology.  Its certainly not beyond the technical capacity of Wall Street today. For example, time-stamping messages down to a microsecond or two within the trading day is a fairly trivial problem, and asking exchanges or firms to write a message indicating ever single order, cancel, or execution just isn’t that hard. More effort goes into showing you those banner ads on your web browser that you ignore.

More importantly, Rule 613 doesn’t ask firms to identify trades as to why they are being entered, i.e. which ‘bot or algorithm is placing the trade, and what the perceived market data is that is generating that trading decision. Most of my problems on my systems were caused when either the market data got confusing, or my systems got confused by the market data.  Tracking that market data that goes into a ‘bots trading decision is key if you want to understand “why” and not just “what”.  If you think of the stock market as a computer program, this is exactly the type of data you want to log to debug the markets.

I could go on like this for quite awhile, but the core problem is the SEC does not understand they are debugging a giant and very important computer program: they don’t understand what data they need to log, where to put the printf() statements.  

The system I think the SEC needs would not only collect everything my old silly system collected in real-time, but validate it in near real-time as well, so that the SEC knew firms were reporting correctly, before they needed to answer any hard questions. 

If I were the SEC, I would make the system open and let third-parties access the data  as well.  That way, the SEC could do less, accomplishing more by not hiring their own army of computer programmers, but instead building an ecosystem around trade data.  Third-party firms could validate the data, in real-time, and publish reports on market dynamics.  Maybe these firms generate revenue by selling reports as well- they will need some incentives to look through all that data.  Maybe multiple entities, not the SEC or exchange-specific regulatory agencies, can scour data in real-time looking for problems, and the SEC can pick and choose  which problems it wants to focus on.  Multiple competing watchdogs, all mining the same real-time trade data, will certainly generate more thorough results than a team of government analysts. There are ways of anonymizing the data so that proprietary trading secrets remain secret, but trading improprieties are still identifiable in real-time.   If the SEC can borrow an idea from the Internet, and build an open ecosystem around trade data for the purpose of monitoring stock markets, we will all be better off. 

The SEC should try treating  stock markets like computer systems that need to be debugged. Once they start thinking of things this way and staff accordingly, I think the SEC will love their job more than ever before. People, or at least Wall Street people, can be deceitful, lying, selfish, nasty things that will do anything for money, including break rules in ways that are terribly hard to find. This happens countless times every day and the SEC can only hope to find the most grevious examples, and even then only at great expense to the taxpayer. 

Computers, in comparison, are predictable, make terrible liars, and while persistent to a fault they are not known for creative rule breaking. Most importantly, they are remarkably easy to monitor once you set up their environment the right way. In an electronic trading world, the SEC has the opportunity to identity and categorize every single transgression, and punish the transgressors accordingly. In fact, the SEC could identify patterns in trading activity that are precursors to results they want to avoid and create market circuit breakers that are specific enough to actually work, as opposed to the one-sided price, volume-blind circuit breakers now in place that have failed to protect the markets more than once. 

The smart computer programmers are working at the trading firms, shaving off those microseconds, not at the SEC helping to debug the markets. That means more flash crashes, unstable markets, and in the end, a worse outcome for almost all of us. 

The SEC needs awesome computer hackers to help write the rules, monitor the markets, and restore the balance. 

Sep
10th
Mon
permalink

Letter to the NYCEDC

Dear <name withheld>

Thanks for thinking of me. I enjoyed our chat, back in early July, about how NYCEDC can best support startups in NYC.

I want you to know that I have given this topic a lot of thought,  and have asked many colleagues and friends for their advice.

All of our collective ideas fall into one of three categories:

1) Things the NYCEDC shouldn’t do

2) Things the NYCEDC can’t do

3) Things the NYCEDC is doing.

Unfortunately, I don’t have any worthwhile ideas in a category you want, “Things the NYCEDC can and should do” 

I am still thinking about this of course, but its been a couple of months and you deserve a response from me.  Hopefully you have an exciting roadmap gathered from  truly smart people. 

You can stop reading now, but I am stuck on an airplane and i think you deserve a bit more of an explanation. 

1) Things the NYCEDC shouldn’t do

I want to tell you to set up incubators, give people free or subsidized office space, internet connectivity, healthcare.  I know people tell you this all the time.

I am not going to tell you to do that. In fact, I beg you not to do that. Subsidies are very hard to get right, and often have exactly the opposite effect from the desired one. Farm subsidies, energy subsidies, parking subsidies, you name it, they have all had terribly negative side effects that make you wonder why we don’t stop them.  Facts like “counties that receive the largest farm subsidies are also the poorest counties in the country” imply a causality that we can break by stopping subsidies. 

Successful entrepreneurs don’t need subsidies.  Office space is a healthy barrier to entry. If you tear it down, you are only helping people who shouldn’t get started, and not helping the people you really want to help. 

I received a lot of ideas that were highly particular and self-serving, like promoting more direct flights to specific tech hot spots, both domestic and international.  Interesting ideas, but i felt that ideas that help an incredibly narrow group would distort the ecosystem much like subsidies.

 After exhaustive debate with others and with myself, my conclusion is simple: if you try to directly help the NYC startup ecosystem you are more likely to distort it or break it than help it. 

2) Things the NYCEDC can’t do

I can think of lots of ways that government can help foster entrepreneurship and small business indirectly.  Unfortunately, I don’t think the NYCEDC can help with these. 

a) Make it easier for foreign nationals with technical talents to work in the US: no matter how easy we make this, it will never be easy enough, and luring the brightest and most motivated people from around the world to NYC so obviously lifts up the rest us.  Its like global warming: no rational person can look at the data, the results, and deny its a good idea but still we make it such a pain.

b) Offer an affordable healthcare alternative: at every startup I create, providing a competitive health care option. Even worse, in my experience it increases at double digit percentages every year.  No other business cost does that.  NYC area insurance options seem to increase at a rate 30% higher than the national average.  Tri-state plans are consistently more expensive., and choices available in other states are not allowed here. The insurance companies say its from regulation,  but I see an environment where regulation is the justification for cost increases, not necessarily the cause.  Regardless, offering health care acts like a huge, unpredictable, and always increasing tax on small business creation.  

I can come up with a longer list here, but I think you get the idea.  

3) The stuff I see NYCEDC doing

You guys already are doing all the best stuff you can do.  Identifying and promoting the NYC tech startup scene makes people aware it exists, makes it an option for people looking for work, or for thinking about where to relocate a startup.   Reporters, academics, CEOs, and others are often surprised we have an interesting startup scene here.  Despite everything you and Mayor Bloomberg have done, keep it up, because there seems to be a daunting amount of ignorance on this topic. 

Your work in help in connecting NYC startup to useful resources, organizing recruiting events, bringing the best and brightest to NYC, promoting NYC as a place for young people to live and work, all that is good stuff.

I will keep looking for some good stuff in that fourth category, but in the meantime all i can offer is “keep it up with category 3”

May
6th
Sun
permalink

My Unexpected Story About Gluten

The story of of how I became gluten free begins at a very specific moment, at 1:12 pm Pacific time as I squeezed between two evergreen trees while snowboarding at Tahoe.  It had been dumping snow for days, and the snow was best in the trees off the edges of the slopes, and that’s where I was.  On one particular pass through some trees I twisted my body just so, and noticed that my chest hurt along the sternum.

I assumed I had pulled a muscle in my chest, and did not think much of it.  After all, two days ago I had been shivering uncontrollably with a 104 degree fever, but thanks to modern antibiotics I was back on the slopes.  A minor muscle pull was not a big deal. 

A week later, snowboarding was over, I was taking it easy, and I was not getting better. I was getting worse.  I could not do a push-up without a lot of pain. I could not lift my kids. 

Two week later the pain spread to my right elbow, and now I could not lift a laptop with my right arm. Maybe some kind of allergic reaction to antibiotics?  A lingering infection related to strep? When I was in college I had gotten strep throat, and the cartilage in my chest had gotten swollen and infected.  Maybe this was something like that? 

Six weeks after my first twinge of pain I was fine and in perfect health, as far as I could tell, except for pain on my sternum and right elbow. I decided to go to my doctor. 

My doctor is a terrific guy.  I met him at a fancy reception a long time ago.  He has some very fancy patients.  Rock stars. Presidents. He also has done some interesting work for governments, the United Nations, and the World Health Organization. Not needing a doctor but wanting a great one for when I might, I started seeing him for checkups and shots for when I travelled to exotic places.  This was the first time I could recall making an appointment for an actual medical problem. 

"Doctor, this may sound silly, but I have this weird, debilitating, and scary problem. I also have a bunch of minor problems that I have had for awhile.  I am going to list everything that is wrong with me.  it might sound silly."

He got his pen and paper ready.

Joint pain, the can be mildly annoying or debilitating, I can’t figure out the pattern of what makes it mild or bad. 

An intermittent rash on my chest that i have had for two years. 

An intermittent rash on my scalp that I have had for a year.

An intermittent problem involving pooping that I will spare you, the reader, the details.  Minor, but worth noting. 

My doctor asked me a lot of questions, took some blood, and was generally baffled.  A few days later he called to say I had tested very slightly positive for Lyme’s disease, which normally is not indicative of anything. I asked to be treated for Lyme’s disease anyway, because I was desperate for a solution. 

At first I thought it was working, because my pain went away for a week, but then it came back. 

After the month-long Lyme disease treatment, I went to other specialists, had MRIs. Several doctors recommended some potential treatments with side effects worse than my problems, but nobody had an explanation or a real solution. 

The pain would come and go, but I could not figure out why. 

One day, my wife was reading an article about a famous tennis player and said, “Hey, why don’t you stop eating gluten?  Maybe you have a gluten sensitivity”

Well, that was simply preposterous. How would I get a gluten sensitivity all of a sudden like that?  Did antibiotics or Strep cause these kinds of things?  Wikipedia didn’t mention that. 

Normally, I would discard this kind of advice, but I was so desperate, so miserable, that I said, “sure, why the hell not?”

Its not really that hard for me to stop eating wheat.  I don’t eat much bread or sandwiches, they always make me feel kind of yucky.  I try to avoid processed foods as a matter of course.  It was, surprisingly easy. 

After four days, my pain went away. Completely. Gone. 

My rashes were gone. 

A whole bunch of other minor problems that I had attributed to other causes, or were so minor I didn’t even realize they were problems were also gone.  A slight congestion that came and went that I thought was a mold allergy.  A minor stomach ache that I thought was from eating too much rich foods with white wine. A long list of minor physical issues that I had always had explanations for.  Gone. 

I came to a sudden realization that I had made up a bunch of groundless stories to explain my problems for years.  I attributed the unexplainable to foods or conditions and all of it was completely wrong. 

I must have had a growing sensitivity to gluten for many years, and the strep infection or the antibiotics pushed me over the edge. 

I have tested my gluten reaction many times, with boringly predictable and unpleasant results.  People ask, “why don’t you get tested?”

I respond, “why bother?  Not eating certain foods that I sort of knew were bad for me anyway solves so many problems for me.  When I eat them, my problems come back.  Avoiding those foods is easy for me. Regardless of the test results, I am not eating those foods.  So what is the point?  I know what i know, and I test it periodically. All good. “

Interestingly, not a single doctor had recommended that I get tested for food allergies.  To be fair, my symptoms, as I had reported them, were atypicall. They were complicated by the snowboarding, the fever, the antibiotics.  The particular moment when I had gone from being what I thought was healthy to being in pain. I don’t blame my doctors for not figuring it out. 

I am so thankful to my wife for making a crazy suggestion. And I am so happy I am better.