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The Virtual World of Yossi Vardi
Margo Lipschitz Sugarman
One stunning success has made Yossi Vardi the guru of Israeli high tech. Can he repeat it, and establish the Internet as Israel's virtual oil field?
Ask Yossi Vardi what he does for a living, and he'll tell you that he's "a stupid guy who invests in very clever youngsters - an enabler of talented, creative, wonderful people who are a third my age and three times as smart."
Vardi's modesty contrasts sharply with the accolades being showered on the 58-year-old entrepreneur these days. The guru of the Israeli high-tech revolution, the godfather of Israel's Internet boom, an oracle of world Internet business - those are just some of the plaudits.
Vardi won that praise after pocketing tens of millions of dollars on a single high-tech venture. He stands to make tens, perhaps even hundreds of millions more, if any of the other dozen-odd promising Internet-related companies he has taken under his wing, and invested in, takes flight.
The commercial brain behind Tel Aviv software company Mirabilis and its ICQ program, sold two years ago to AOL for $407 million, Vardi is today arguably the central player in Israeli high-technology business. And that business, in turn, has become central to Israel's economy: Its products account for a staggering $10 billion of Israel's 1999 total $25.7 billion in exports.
Vardi's virtue, admirers say, is that it's not only his money, but, critically, his experience and advice, that he invests in the companies that catch his eye. When Bob Rosenschein, founder and CEO of Jerusalem-based GuruNet, raised the tentative idea of an on-screen Internet translator, Vardi helped him develop the product, which also now gives dictionary explanations of words on the screen, thesaurus alternatives, and links to other relevant sites. And when the company was taking shape, Vardi became an investor as well.
"He brought creative thinking," says Rosenschein. "While he's not particularly technical, he has a feeling and a smell for what the users like and how to reach them."
That quality has made Vardi one of the country's most sought-after informal business consultants: The telephone in his cluttered office, in the basement of his elegant, spacious home in the well-off north Tel Aviv neighborhood of Ramat Aviv, keeps on ringing. Wannabe entrepreneurs seeking their own pot of investors' gold, and to involve Vardi and his money in their ventures; CEOs of some of the world's most prestigious tech companies; friends who missed out when he offered them a piece of Mirabilis and don't want that to happen again - all are out to pick his brain.
Asked why he gives them all advice, and for nothing, Vardi replies cheerily: "What do you want me to do, go to the grave with all this knowledge in my stomach?" In addition, of course, being privy to this constant flow of business chat keeps him tuned in to developments - and new opportunities.
In truth, much of his reputation is based on Vardi's one big high-tech win, with Mirabilis. There's no doubting his charisma, nor the affection and respect he generates, nor his impressive track record in years of government service. But it will take a second winner, or a third, to confirm that the high-tech star billing is entirely justified - that he's real, not virtual.
Almost all of Vardi's investments are Israeli start-ups. "Israel and the Internet are a perfect match - they've waited 2,000 years for each other," he argues, citing Israelis' ability to innovate, work in teams and take responsibility when necessary. "And these are the early stages. The Internet will change everything - business, culture, the entire economy."
Vardi doesn't spell out a specific formula for the future of Internet business. But his own investments center on the idea that making the Net easier to use is the key to making money. And many of them apply the crucial lesson of Mirabilis: A company can give away a program or service for free - and yet become very valuable because other businesses will want to reach the large audience it has built for itself. It's a new twist on the old line about losing money on every item, but making it up in volume.
So, for instance, he has invested in R U Sure, which produces a program that helps Internet buyers compare prices. The firm, barely two years old, is gaining hundreds of users every day.
The same is true of Speedbit, whose Download Accelerator Plus program speeds up the transfer of files from Websites to home users. The program is fast becoming one of the most popular Internet tools worldwide - again, users get it for free, although there are ad banners on the site.
The big question is whether the Mirabilis miracle can repeat itself. Lots of companies have caught on to the idea of giving away products to develop user-bases; it's not clear whether they all can attract buyers. Vardi's new generation of Israeli start-ups could take his and other investors' money and go nowhere. But if Vardi's instincts prove acute, they just might bring in hundreds of millions of dollars ... and turn the Web into Israel's virtual oil field.
During a three-hour interview with The Report, Vardi sits behind his desk among piles of papers, with a headset at the ready for those incessant incoming calls. He's warm, garrulous and constantly interrupted: He has no secretary, and takes his own calls all day, except between 2 and 6 each afternoon, when, without fail, he naps. (Footwear is another article of faith: Vardi wears Reeboks everywhere, even on the rare occasions when he's compelled to exchange open-collared shirt and slacks for a suit and tie.)
Scratching his wispy head of receding, graying hair, the rotund Vardi digs out a wad of notes for a series of lectures he'll be giving at Tel Aviv University on the concept of Viral Marketing, his current pet subject and the secret of ICQ's success: The product spreads like a virus because it is passed from user to user, over and over again. ICQ's instant Internet communications program is of little use unless each person who puts it on his or her computer passes it on to friends. Two years ago, when it had 30 million users who all got it for free, ICQ was worth megabucks to AOL. Now 60 million people have downloaded the (still-free) program, and installed it on their PCs. All that was accomplished without spending a cent on marketing: ICQ sold itself.
Since Vardi comes from the business side - he has no technical computer background and his Technion degrees are in industrial management - his flair is for bringing simplicity into products designed by software engineers.
"Yossi always talks about the user experience and how a product, no matter how good it happens to be, won't make it unless it's simple," says Ori Hadar, president of R U Sure. "Programmers, who know how sophisticated programs work, want to add more features. Yossi, who comes from the other side, wants to make the user happy."
The success of Mirabilis catapulted both Yossi Vardi and his son Arik into the media headlines, in addition to making each of them an estimated $90 million (The Report did a cover story on the firm, entitled "Annus Mirabilis: How Three Tel Aviv High-Tech Whiz Kids Got the Whole World Talking," in August 1998).
But Vardi had long been at the forefront of Israeli government and business, and had high-tech credentials stretching back to the early 1970s, when he and a group of colleagues set up Tekem Advanced Technologies, one of Israel's first software firms, which built defense systems and was later sold to Tadiran. "I was 26, the same age then as Arik was when he established Mirabilis," he smiles.
The father's pride in the accomplishments of Arik, who never finished high school, surfaces in just about every other sentence. "I fought with him about his grades all the time he was in school," he smiles. "I'm a Jewish mother."
School wasn't a priority for Vardi either, he acknowledges ruefully; he spent many a school day on the Tel Aviv beach. And it was only maternal pressure, "and a lot of tutors," that saw him make it through the air force's technical school, and then, after the army, complete bachelor's and master's degrees at the Technion. "Getting me an education was a No. 1 priority for her, and she was devastated when I did badly at school," he recalls. "Until a few years before she died she'd ask my older brother, Yedidyah, to assure her that I wasn't really an idiot."
Vardi was born in Tel Aviv in 1942, to immigrant parents who owned a restaurant on Sheinkin Street, today the hub of the city's caf_ culture. His mother, who was from Byelorussia, was a socialist; his Polish father was a Revisionist; and he grew up singing left-wing workers' anthems and the rightist slogan "Two Banks of the Jordan" with equal gusto. "That's probably why I don't find the political side of people very interesting," he says, adding that his own views are center-left.
His childhood memories from Israel's lean years include watching his mother making chopped liver out of eggplant, and eggplant salad out of potatoes. "We're not sure what she used to make potatoes," he laughs.
Fresh out of the Technion, he spent two years in the management of Rafael, the government's arms development authority, then went on to Tekem. At 27 - hired on the recommendation of a Technion classmate, now-Likud MK Uzi Landau, son of then-development minister Haim Landau - he was appointed director general of the Development Ministry, a post he held for five years.
Vardi's next government job was as head of the Israel Investment Authority in New York. Eitan Raff, today the Bank Leumi chairman, at the time economic adviser to the Embassy in Washington, recalls how Vardi convinced American business leaders that Israel was a good investment. "Yossi is very talented, he's a good negotiator, and he treated everyone, no matter how important, the same way." When Simcha Erlich, finance minister in the late 1970s, was visiting the U.S., Raff relates, "Other members of the mission fawned over Erlich. And when they were done, Yossi literally got down on all fours in front of the minister, and said: 'Would you like me to carry you on my back? I also want a promotion.'" Erlich, says Raff, was most amused. (Vardi is extremely proud of his clowning and wisecracks. "Please write that I'm a funny man," he implores. "That's the one thing I want people to know about me.")
On his return, he helped establish the Energy Ministry in 1977, and served as chairman of the Israel National Oil Company, which struck crude at A-Tur on the western side of the occupied Sinai Peninsula. Oil brought him into the peace process with Egypt, as chief negotiator in talks on returning the Sinai fields, participating in the 1978 Blair House sessions alongside Moshe Dayan and Ezer Weizman.
When he wasn't rubbing shoulders with the political elite, Vardi was carving himself a niche in the business world. With various investors, he established the Alon Petrol Company in 1979, which set up a chain of gas stations around the country, and Granit Hacarmel, a holding company whose assets include the Sonol fuel distribution firm.
"I am a serial corporate builder," he says of his track record in starting businesses and then moving on. "It's the creative side that interests me, building a context and content from chaos. I like to give it shape, then look for the next creative challenge when it starts maturing."
He also advised the World Bank on energy issues, and guffaws about a report he was asked to write in 1980: "Non-commercial, non-conventional, indigenous, traditional, alternative energy resources in the developing world." The Bank supplied him with an office in Washington, a pile of yellow pads and lots of pencils, which every day were mysteriously resharpened. "When I asked them which energy resources they wanted me to explore," he chuckles, "they told me 'cow manure.' So, for a month, I dived in."
To monitor efficient use of this cheap energy source, Vardi recommended that selected Third World farmers be provided with scales and satellite terminals to send the data on to Washington. His plan was turned down by World Bank officials as impractical. "Today," he muses, "it could actually work, with the Internet."
After that dalliance, Vardi returned to Israel and a series of conventional businesses in the energy field. He also served on the boards of top companies like Scitex, Bezeq, Elite and Ma'ariv.
And then, in 1996, Yossi Vardi discovered the Internet - not by virtue of particular foresight or intellect, he happily admits, but through his oldest son.
Mirabilis wasn't the first of Arik's ventures to get some of Dad's money: Vardi had already handed over start-up funds for two considerably less successful enterprises - in software and in T-shirts - before Arik and some friends came up with the idea for ICQ. The investment in the company, which developed the Internet's most widely used communications and chat tool, was between $3 million and $4 million - most of it Vardi's - and more than 90 percent of the firm was owned by Vardi, Arik and his two key colleagues. "The Mirabilis sale was a stroke of genius," says Eitan Raff. "The company wasn't earning a cent, but Yossi understood that what he was selling was the user list, not revenues."
The Mirabilis seed money-raising period has become Israeli business folklore, with stories of Vardi Senior trying to get his numerous high-powered business contacts to invest a few thousand dollars each. "I offered a piece of Mirabilis to a lot of people, but at the time it sounded so unbelievable," Vardi says. "We were one of the first to operate with no revenue model at all. Today, everyone knows that 'eyeballs' are what's important on the Net. But back then, it was considered quirky to give away software."
Those who invested tens of thousands of dollars got back millions when Mirabilis was sold in 1998. The $407 million paid by AOL was the highest price an Israeli company had ever fetched abroad. "It was a lot of fun to sit back and watch something you were part of take off," he says. "The boys are heroes, who changed the dreams of young Israelis." (There have been larger deals since then, including the $650 million sale of New Dimensions software to BRM of the United States.)
The success also established Vardi as the oracle everyone expects to pick the Internet winners in Israel. "It's ironic," he adds. "I had invested in high tech all over the world and in Israel, and at the end of the day I found my biggest success at home, with my own son."
Contact with AOL didn't end with the deal; since then, Vardi reportedly has been working closely with Steve Case, CEO of the American Internet giant. Case has called Vardi his "eyes and ears in Israel"; Vardi, unusually, won't discuss the ongoing relationship.
Talma, Vardi's wife of 33 years, whom he met when they both were in the army, comes into the room. Vardi credits her with helping him maintain a sense of balance, despite all the money and attention. "She keeps us sober," he says, serious for a second. Then it's back to joking mode: "The day I married her, I told her that I was jealous of her for marrying someone like me," he quips. She shrugs off the line, clearly not hearing it for the first time, and makes fun of his expanding waistline. When he comes back with a dig at her gray hair, she blunts it nimbly by saying he gave it to her.
Internet runs in the family. Second son, Oded, 28, is involved in R U Sure. And when third son Dani, 25, finishes his computer studies in Tel Aviv, he'll be recruited into another of the businesses.
Despite his advanced age, for the field, Vardi has no intention of easing up on the lectures, the phone calls, the offers. Fact is, he's having fun. "The Internet is like a toy shop," he says.
And rather than expecting gratitude from his multi-millionaire son and his partners, Vardi, only half-joking, gives the credit to them. Mirabilis, he says, "would have made it big" even without him. But without it, "I certainly wouldn't have been seen as such a wise man."
2000
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