‘Yossi’ Vardi has been a high-tech entrepreneur, a venture capitalist and an advisor to the Israeli central bank.In 1996 a small Israeli startup called Mirabilis developed an application for the Internet that allowed users to send text messages to each other in real time. The program was named ICQ. Only a year and a half later this small, unknown company was sold to America Online for a reported $400 million. The legendary founder and former chairman of Mirabilis is Joseph “Yossi” Vardi, one of Israel’s most famous and successful business figures. Sometimes referred to as “the grandfather of Israeli Internet venture capital,” Vardi has funded more than 20 Israeli technology companies, four of which are among Cnet’s top 10 Internet downloads. In an exclusive interview for ISRAEL21c, Vardi shared his thoughts on the success of ICQ, the future of the Internet, Israel’s role as a global high-tech player, and the state of Israel’s economy.

ICQ – Even though AOL now owns ICQ, Vardi still has a personal fondness for his most successful venture. With over 120 million users, ICQ is one of the most popular and widely used features on the Internet, and reflects Vardi’s optimism about the Internet’s future: “What I see in many of the companies in which I’m involved is continued growth in demand for the Internet. In ICQ, we see over 100,000 new users joining the service every day, so there is still more usage, more hours, more demand for the Internet. This represents opportunities for the future.”

ICQ’s success was based on the development of a simple networking innovation that revolutionized the way the Internet is used. Vardi explains this simple but powerful development: “ICQ pioneered an architecture that has been embraced by every player in the Internet, and this is the idea of having the work done by the ‘client to client,’ with a middle server just mitigating the addresses. The success of ICQ is due to this architecture. This allowed us to scale up so easily and so quickly. Today this simple architecture is used by many Internet companies such as Napster, but was done by ICQ as early as 1996.”

Optimistic about a comeback – Vardi believes strong demand will drive a market comeback, and that Israeli companies will play an important role in the Internet’s future: “There is a disconnect between the organic demand for the Internet and the way the financial markets perceive demand for the Internet. Before March 2000 there was an over-shoot by the markets, and since March 2000 I think there has been an under-shoot. This industry is still very young, and I think that the number of startups closing down is no different than for non-Internet startups overall. I still see a lot of opportunities. Before last year there was an oversupply of companies and technologies, of people, and hype, which is why such high expectations were created and such a large disappointment was felt. Overall, the Internet is still a great space in which to be active, however in a more sober and realistic way. And I think that Israel has a great role to play and is playing this role. Overall I am kind of optimistic, and less disappointed – maybe that’s because we did so nicely with ICQ.”

Vardi is an optimist because he understands the culture of Israeli ingenuity, and he believes that Israel is socially an ideal place for developing end-user Internet applications. He points to Israel’s youth as a key factor in this success: “Among the top downloads on the Internet there are a disproportionate number of Israeli products. Against common beliefs that Israeli companies are only good at enterprise, data networking products, you see that there is also a great understanding of the end user. This is because of the great involvement of the Israeli youth in the Internet.”

Israel as a global technology player – Vardi also believes that Israel’s culture and media habits are linked to its success as a global Internet player: “If you look at the countries with a high proportion of PCs to TVs, Israel ranks third in the world after Singapore and Switzerland. Israeli people are more PC-inclined than TV-inclined, and this creates a culture and understanding of the products. It seems that the Internet and Israel have waited for each other for 2000 years. Because the Internet is insensitive to location, it’s a product that is not sensitive to boundaries. There are no customs, no protections. You need to be innovative, creative, have a quick response. It is very suitable for the local culture and the local conditions.”

There are other factors, like a history of innovation in Israeli defense-related technology that would suggest Israel as an obvious leader in certain commercial technology areas such as wireless communications: “We see Israel involved in a number of cutting edge technology areas related to the military. I think that there is an exceptional understanding in this part of the world for wireless. This is because we combine GSM (Global System for Mobile Communication) with understanding of telecommunications and data networking, and the convergence of data networking and wireless telecommunications. After Scandinavia, Israel is one of the world’s leading centers of innovation in wireless, be it location services or SMS (Short Message Service), integrated services or infrastructure.”

There has been an increase in demand for Israeli anti-terror technologies since Sept. 11, and the Israeli defense-related technology companies have benefited from this demand, Vardi said: “We have 40 to 50 companies who are doing security, and this is an offshoot of many years of involvement in the defense area. Another technology area that is emerging very quickly is high-tech applications for anti-terror. And Israel has a lot to offer in this area, both in hardware and in software. So as soon as the high-tech sector comes back from the current slump, you will see a re-flourishing of these industries. I think you are already seeing Israeli companies capitalizing on bigger demand for security.”

The Israeli economy – In addition to being a successful Internet entrepreneur, Vardi has also been an economic advisor to various Israeli governments since 1979. He has been involved in the development of Israeli fiscal and monetary policies, as well as in planning for regional economic cooperation during the Camp David talks of last year. Vardi said high tech tends to fit the size Israel’s economy and the nature of its workforce better than more-traditional forms of manufacturing: “Look, it’s not good for an economy to be dependent on one sector. Also, it is highly impractical to take an entire population and make people work in one sector. So I don’t think the whole economy should be based on high tech, but I have no doubt that the high-tech sector will be a driver of the whole economy. I think that part of building a new society is to take kids and move them into more value-added professions, because (Israel) is not going to be a textile country. We can’t compete and we don’t want to compete. Our resources are limited, we don’t have industrial goods, and we don’t have the domestic size.”

Vardi believes that the underlying causes of Israel’s present economic problems are fiscal in origin: “The major cause of today’s recession in Israel is misguided fiscal policies of past Israeli governments. I have no doubt in my mind – and after many years on the advisory board of the Bank of Israel – that we are now paying the price for six years of overemphasis on anti-inflation, and of central bank policies that focused too much on anti-inflation and not enough on social aspects of the economy. I was elated to learn today that the government was able to affect the reduction of interest (rates). I think we lost five or six years because of the policies of the former governor of the central bank – and I’ve expressed my total disagreement and unhappiness before with these former policies. The special structure of the Israeli economy and the Israeli community is such that you cannot maintain economic policy without social care, social awareness and creating jobs. Losing jobs in order to stop inflation is, for me, totally unacceptable. When we do this we pay a major price, not only in economic terms, but also in social terms, and in the strength of the country.”