2 Modern Israeli Heroes Are a Study in Contrasts

One is larger than life, a bear-sized bon vivant whose booming voice seems always to be hurling wisecracks to someone on the other end of the telephone, a visionary whose sale of his profitless Internet company to America Online Inc. for $400 million made him a national hero in Israel.

The other is a restless introvert who began his university studies at 14, who is so smart that not even the talent-hungry Israeli army could figure out at first what to do with him, and who has built an $18-billion company that is today the most valuable Israeli firm listed on Nasdaq.

To understand Israel’s technology boom, which has turned the country into the third-largest incubator of high-tech start-ups in the world, one must understand both Yossi Vardi and Gil Shwed. The first is a developer and nurturer of great products, part entrepreneur and part venture capitalist, always on the lookout for the next great consumer application. The second is a single-minded builder of a dominant worldwide enterprise.

If Vardi and Shwed are the twin folk heroes of Israeli high-tech, two twins could hardly be more unalike.

The differences are not merely physical, although Yossi Vardi is nearly twice Gil Shwed’s age and three Shweds could fit inside the waistband of Vardi’s trousers. Their approach to business as Israeli entrepreneurs is also poles apart--at least on the surface.

For the two men’s companies, Vardi’s Mirabilis Ltd. and Shwed’s Check Point Software Technologies Ltd., define the central quandary of Israeli high-tech: Should Israeli entrepreneurs focus on developing the best technology, even if that means selling it to foreign businesses to exploit? Or should they embark on the more tortuous road of building great multinational enterprises that the country can call its own?

To be sure, both men believe there is room in Israel for both paradigms.

“My vision is that the economy here has to be like Silicon Valley,” says Vardi. “Some small companies and some big companies. But if your goal is to address the final user, your company has to be in the U.S. It’s inconceivable to sit in Israel and build a CBS.”

“The market needs balancing,” Shwed told a Tel Aviv newspaper recently. “Not every company can be Check Point and not every company can be Mirabilis.”

Yet “they’re a stark contrast in many ways,” says Charles Federman, a friend of Vardi’s and an American partner in the Israeli investment firm BRM Group, which provided Check Point with its initial seed capital of $300,000 in 1993. “Yossi represents a bridge generation, when the objective of [Israeli] entrepreneurs was to build a company to sell it. Gil is an example of what I expect to come out of Israel in the future. He’s saying there’s a worldwide market and you can really serve it from anywhere.”

Seen another way, they are exemplification of philosopher Isaiah Berlin’s partition of great thinkers into hedgehogs and foxes--Vardi the fox, “who knows many things,” and Shwed the hedgehog, “who knows one big thing.”

One must begin with Vardi, if only because he arrived first. A member of Israel’s first generation, Vardi was born in Palestine in 1942. After army service and a string of advanced degrees from Technion, the Israeli institute of technology, he embarked on a civil service career organizing energy and development projects and occasionally trying to bring order out of Israel’s chaotic state-owned industries. At the age of 27, he boasts, he restructured a number of smaller companies into Israel Chemicals, which then ranked as one of the largest companies in the country and is still a major government holding.

Over the years he accumulated a throng of devoted friends destined to mature into political and economic leaders of the young state. The average soiree at Vardi’s sprawling Tel Aviv home today is likely to include the chairmen of two or three of Israel’s largest conglomerates, the heads of its two largest banks and the occasional ex-prime minister, all mingling with a clutch of promising young entrepreneurs fresh out of the army or university.

These latter stream into Vardi’s office seeking advice that he dispenses sometimes out of sheer generosity, or sometimes with a seed investment. It’s then that Yossi Vardi, the fun-loving raconteur, can turn in the blink of an eye into Dr. Joseph Vardi, the trained operations engineer, fixing a young engineer or businessman with a skeptical glare over his wire-rimmed glasses, asking razor-sharp questions that define what’s wrong with an idea and how to fix it.

“Yossi called me up one day in 1999 and said, ‘Bob, you’re really an idiot. . . . You’re sitting on nine-tenths of a killer app,’ ” recalls Bob Rosenschein, an American whose Israeli company was planning to market a CD-ROM that would instantly translate any word on a computer screen into a different language. “I said, ‘Yossi, I’ve been trying to keep that a secret for years, but what are you talking about?’ ”

On Vardi’s advice, Rosenschein redesigned his application into what would become GuruNet, an Internet-based application that delivers not only translations but definitions, synonyms, Web searches and maps at the click of a mouse. “He said, ‘Make it something dynamic, with live information, over the Internet,’ ” Rosenschein recalls.

It was that instinctive grasp of the Internet that led to what made Vardi a household name in Israel. Mirabilis started as a venture by his oldest son, Arik, who had dropped out of school after 11th grade, and three pals, Yair Goldfinger, Sefi Visiger and Amnon Amir.

Appalled as he was at harboring a dropout in his home, especially one who had started teaching himself programming at age 12, Yossi Vardi nevertheless had given them $50,000 to start a Net service provider.

When the ISP failed in 1996, they started working on a computer messaging program that would tell users when their friends were online and available for electronic conversation. The result, ICQ (pronounced “I seek you”), turned into one of the most effective community-building applications ever developed for the Internet. The elder Vardi, who established himself as ICQ’s “founding investor,” had immediately grasped its potential. “I was blown away,” he remarked later. “It was the best product I’d seen in my whole career.”

Already steeped in the power of the emerging Internet, Vardi understood that as each new user persuaded multiple friends to register for ICQ, the better to communicate with each other, its audience would grow exponentially.

He also understood that any application that could amass users at the rate of nearly a million a month without advertising could be worth millions to somebody, even if it never earned a dime in direct revenue. That was a revolutionary notion in Israel at the time--to ICQ’s young inventors no less than to Vardi’s well-heeled friends, many of whom turned down the chance to invest in what seemed to be a voracious black hole of capital.

So when the acquisition offers started coming in, Vardi bided his time. There was a $3-million offer that had his young charges dreaming of new cars. Vardi told them to cool it. The bidding rose to $200 million, and finally AOL’s $407 million in 1998. ICQ, which has continued to grow rapidly, now gives AOL access to 73 million registered users.

In Israel, however, ICQ’s significance is much more profound than that of a globe-encircling computer tool. “ICQ was a watershed,” Vardi says. “With that sale . . . high-tech in Israel instantly changed from data and communications to the Internet, because every kid with a computer realized something like this was achievable.”

Thanks to the Internet, it was clear, one no longer needed an advanced engineering degree to make money in high-tech. The Internet was so malleable a medium that any kid could hatch a great idea in a garage and sell it for millions.

Vardi has never let his doubters forget the outcome. At a Tel Aviv party he spots two close friends, both non-investors, and cracks: “Here’s $400,000 in losses right here.” (“I felt so bad about their not being in my winning deal that I let them into some of my losing deals,” he confides, deadpan.) Another friend, perhaps weary of Vardi’s incessant rehash of the old story, presented him with a stack of privately printed bumper stickers reading, “I didn’t invest in Mirabilis either.”

Mirabilis also epitomized a whole subculture of Iraeli high-tech: inspired programmers developing consumer applications that probably cannot serve as the cornerstone of a large corporation, but can add value to established businesses looking to enhance their customer appeal.

The Mirabilis sale, as it happens, temporarily obscured the success of Israel’s leading counter-example: Check Point Software, which had raised $59 million in an initial public stock offering on Nasdaq two years earlier. By June 1998, the date of ICQ’s sale to AOL, Check Point’s market value in the U.S. was up to $316 million. (Its market value today is roughly $18 billion.)

Check Point was the creation of an individual whose intellectual gifts had set him apart almost all his life. In contrast to Yossi Vardi, a man who moves laconically yet seems to fill up a room, the 32-year-old Gil Shwed is a blur of motion who might as well melt into the paneling. Submitting to an interview in his trademark black garb, he doesn’t sit in a chair so much as bounce around in its force field, like an electron excited to a higher quantum state. It is because of that intensity, as much as the $1.8-billion value of his Check Point shares, that he is often called Israel’s Bill Gates, or sometimes “Gil Bates.”

The son of a government systems analyst, Shwed recalls discovering computers at the age of 10 on a visit to his father’s office. By 14 he was writing programs for a computer company and simultaneously attending high school and a local university, where he proved an indifferent classroom student. “I went to some classes and very quickly went my own way,” he recalls.

In the army, as in his studies, Shwed was intent on forging his own path. He would have qualified easily for any of the army’s special training programs for gifted students, but he turned them down. “I’d have to go to university for three years and the army for six. At the age of 17, I didn’t want to commit myself for the next 10 years of my life.”

Shwed’s reluctance to be shoe-horned into an elite program presented the army with a quandary. “They didn’t know at first what to do with me--they even sent me at one point to learn Arabic.”

Eventually, however, he ended up in the right place: the classified 8200 unit of army intelligence, a brainpower mill that has produced dozens of the country’s high-tech leaders.

There, in the late 1980s, Shwed was confronted with the problem that would inspire his life’s work. The problem was how to connect the military’s numerous computer networks without compromising the security of the most classified among them.

“I’d need to create a program that inspects every connection passing through the network,” he says. “So I created a language that describes every [data] packet.”

His solution had all the elements a military application needed: It was compact, efficient and easy to learn. As it happened, these were the same qualities demanded of a successful commercial application.

Several years after leaving the army, following employment as a computer consultant for Tel Aviv companies, Shwed and two partners began working to deliver the same security to commercial users as the army had required. The product, known as FireWall--a term that has become generic in the computer world--allowed data to go out of a network but kept all but authorized users and information from coming in. The only drawback was that there were almost no commercial customers whose data networks raised the same security concerns as the army’s. That changed, however, with the rise of the Internet after 1993.

“We started seeing hundreds of companies connecting to the Internet every month,” Shwed says. “The security risk was obvious. It became the No. 1 concern. Seven years have passed and it’s still the No. 1 concern.”

Today Check Point claims 52% of the worldwide market for commercial firewall programs. But what sets the company apart is Shwed’s ambition to continue growing a global company with an Israeli character.

That means resisting pressure to relocate significant parts of the business to the U.S., its biggest market. Although some 40% of the company’s more than 850 employees are now located in the U.S., where Check Point maintains a branch headquarters in Redwood City, Calif., Shwed says that the firm gains more from keeping its top management in Israel, where the bulk of its research and development takes place.

Even the company’s initial venture financiers have “tried to convince us to have an American CEO,” he says. “We met a few and thought it was the wrong thing. We’re here in Israel because the talent is here, and the main thing the company needs is talent.”

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