A Conversation with Yossi Vardi

Israel's legendary startup guru and tech investor explains what he looks for in a new business and how he assesses an entrepreneur's potential

Yossi Vardi is known as Israel's startup guru. For nearly 40 years he has helped to found and nurture over 60 companies in industries that include software, Internet, telecommunications, and energy. At 26, in 1969, he co-founded his first business, Tekem, one of the first software firms in Israel. Vardi was also the founding investor in Mirabilis, which created ICQ, the first Internet-wide instant messaging program. The company was launched in 1996 by his son, Arik, and three friends, and sold to AOL (TWX) in 1998 for about $400 million. The sale helped open the floodgates for numerous Israeli entrepreneurs.

Today Vardi remains active in investing and building startups, including Answers.com; Gteko, which was sold to Microsoft (MSFT); Airlink, which was sold to Sierra (SW.TO); and Tivella, which was sold to Cisco (CSCO). His expertise has been sought by companies all over the world. He has been an adviser to the chairmen of AOL, Siemens (SI), and Amazon (AMZN), among others.

Recently, staff writer Stacy Perman spoke with Vardi about places that foster entrepreneurship, what he looks for in a startup, and how he assesses an entrepreneur's potential. Edited excerpts of their conversation follow:

Why is Israel such a hotbed of entrepreneurial activity, particularly in high tech?

It's not about technology. Technology is like a piano. You need to have it to create music but you really need the pianist. The entrepreneur is to technology as the pianist is to the piano. This is why we see countries with great technologies like those in Western Europe that don't have great entrepreneurs. Western Europe has great companies but not a vibrant startup environment. There is this culture in places like Israel and Silicon Valley where there is a certain energy, where people are willing to take chances and risks and fight for new ideas. It is at a totally different level.

A number of companies, including Google (GOOG), Microsoft, and Intel (INTC) have set up research and development centers here. More are in development.

What do big multinationals see in Israel's small startups?

U.S. multinationals do more R&D here than any other country in the world, more than in China and India, which are known for their manufacturing and software [respectively]. We are in the role much earlier in the food chain. This is a 'startup country,' socially and culturally, it is in our heritage, our ethos. It all started with the kibbutz that started a new way of life in agriculture. The country is constantly renewing itself all the time.

This question often comes up: Is entrepreneurship something that can be learned? Where do you stand in this debate?

No. It can be honed but not learned. Either you have it or you don't. You can learn to write a business plan or to develop software. After ICQ exploded and was downloaded millions of times, I asked myself what was the secret attraction. If you look up ICQ on Google there are 675 million mentions. It is a huge brand. I spent three years trying to figure out why it was so compelling as a product and at the end of the day my conclusion was that it was just something brilliant. It is like Spielberg at the movies or a great painter, you can't learn to be a genius. Either you are or you aren't. The question is: Can you teach someone to be talented? Being an entrepreneur and being talented, those are God's gifts.

You've created quite a reputation for yourself as someone who can divine the next big thing. When you go to invest in entrepreneurs and new ideas, what do you look for?

Let me start by telling you what I don't look for. I don't look at business plans. After 38 years I've found that 100% of business plans say that their idea is very good. I think they are useless. I also don't like PowerPoint presentations. I don't think you can judge the validity of an idea. Maybe someone else is working on the exact same thing elsewhere. I found the more I liked the idea the bigger my losses were. Falling in love with an idea makes your vision blurry. I don't like demonstrations because the young guys showing me are so enthusiastic they think it is the greatest thing in the world—at least in their life, and if you don't fake an orgasm, they go away very disappointed.

What do you look for?

First, I am most focused on the Internet and mobile consumer interface applications because it is the consumer who judges the product every time.

When I go to invest, I am first of all looking for talented people. Second, someone with good character. Third, that they are nimble and their way of thinking is fast because they have a terrific advantage. Fourth, I want them to be focused on one thing. Fifth, I like investing in the very early stage, the first investment where the risk is the highest and the valuation relatively low. This is an area where I feel most comfortable but most other investors do not.

How do you know if someone is talented or not?

This is a very good question. It is like in high school. Who really knows who is talented isn't the teachers or the parents, it is the peers. I have a panel, the best panel of people who know what is going on. I don't take cold calls. First, if someone is going to meet with me they have to be referred to by someone on my panel. It's been working for me. So far this year [2007] I've had five successful exits.

Over the past 38 years how would you measure your wins vs. your losses?

I'd say about a third of my investments have been losses and two-thirds have been winners. But let me qualify the wins: One-third are dragging and not doing great. One third gives a very good return. Of the remaining one third, about 10% gives a very high return, like 10 times the initial investment. In the last five years, I've invested in about 65 companies, and in all of my life about 90.

How do you feel about investing in people whose previous ventures have failed?

If someone has failed that is not a deficiency for me. I think that he has more motivation. I've seen many examples where someone was successful first and failed later and failed first and then succeeded. If they failed in an honest way, I don't see it as a deficiency. In the end, I think that people that are not willing to take the risk to fail are not true entrepreneurs. If you are afraid to fail, then you should go and become a banker.