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Interview with Ed Odenwalder, Top of Asia

For our interview today, we thought we'd catch up with Denver-based Top of Asia (www.top-of-asia.com), a fledgling venture capital firm targeting wireless Internet access providers and related businesses in China. Founded less than a year ago, the company announced its first portfolio investment (United Wireless Ltd.) last month. Ed Odenwalder, Top of Asia's president and chief executive officer, recently took a moment to answer several questions about his company, how a Denver venture firm ended up investing in China, and China's growing technology industry.

You just spent a few weeks in China. Care to tell us what went down while you were there?

Ed Odenwalder: I was there for a month, and had several objectives there: The first is we are in the process of completing a contract with China Netcom, which is one of the largest communications companies in China. Theyíre known as the second-largest landline provider. I forgot how many landlines they have, but itís well over a 100 million. Through our company in China, United Wireless, we have been pursuing an opportunity with China Netcom to be their broadband wireless access provider in a large portion of their geography.

Wait a secondóbroadband access provider? I thought you were an investment firm?

Ed Odenwalder: We have been investing in Mainland China through United Wireless. To go forward with that type of venture, with China Netcom, you have to go through several phases. But the end game is to form a joint venture company with China Netcom. So, right now, weíre working on what I would consider to be an interim step, which is a contractual relationship. It also positions us to go further into funding the venture, which will move us closer toward a joint venture corporation.

The first objective was to continue to get that contract finalized. This is something that weíve been in the process of doing for a number of months. We already have a letter of intent, and weíre just putting in some of the final details.

The second objective is weíve begun putting in work on the ground in China in anticipation of the contract being completed. No one, including China Netcom, wants to slow down the deployment. Weíre working on the contractual relationships while, at the same time, in the city of Hangzhou, which is 100 kilometers south and west of Shanghai, weíre working with a Chinese technology provider, Sinwei, to finish deploying broadband wireless there.

And, lastly, we have another company in Hangzhou that we are in the process of acquiring. Itís a vertically integrated manufacturer of smart cards. They produce the software, hardware and everything in between. Their growth projections are tremendous.

Do you speak Mandarin?

Ed Odenwalder: (laughing) No. This was my sixth or seventh trip since last fall, and for the first three trips, I tried to arrange to have time for some tutoring, and my schedule never really permitted it. And then I tried to take a course on my iPod. But, boy, oh boy, itís a tough language. Iíve got two 17-year-olds who both know three languages and when they hear me, they just laugh. They think that somehow, that part of my brain doesnít exist. I really struggle with Mandarin. Thatís one of my goals, though.

One thing that would surprise you is there are more English speakers in China than in all of the United States. I have a hard time running into them, though.

How did you get involved in investing in China?

Ed Odenwalder: Well, I got involved in this after a group of angel investors asked me to look at a stream of investments theyíd made over the past few years to try to enter China. I felt like the communications industry, which I wanted to get back into in a big way, was ripe to take off back there. Theyíve got hundreds of millions of people with cellular coverage and still all sorts of demand over there for Internet coverage.

So, as luck would have it, I got to go in and look at what these guys had done and discovered that this China Netcom opportunity was real. So we took what they had done over the past three years and repackaged it as Top of Asia and began to pursue additional investing.

This group had a number of failed attempts to establish a foothold in China, but, after doing some due diligence, we determined there were a couple of opportunities there that were very real. Basically, we had to get the company formalized and bring in some new money. Thatís what I did last fall, and that resulted in the creation of Top of Asia.

Any plans of expanding to elsewhere in Asia?

Ed Odenwalder: Not at the moment. China is just such a vast land of opportunities. We really need to do a couple of things. Some of the angels that Iím working with have been involved for two or three years now, and Iíd like to get them a success. Right now, the China Netcom venture is potentially very large. This agreement with China Netcom that weíre working on involves a dozen cities with populations of a million or more. Hangzhou alone is around 8 million. And our relationship with China Netcom would cover an entire province, Zhejiang.

How cooperative has the Chinese government been?

Ed Odenwalder: As you can imagine, nothing happens over there without the blessing of the government. At the end of the day, as I constantly remind our investors, China Netcomís senior executives are politicians first and senior executives second. The company is primarily state owned.

Itís so ironic and contradictory in my mind. Itís a NY Stock Exchange company, yet itís owned by the Chinese government. When I got involved and said there was a good opportunity there, one of the things that caught my eye was that the letter of intent that we had had been approved not only by China Netcom itself but also by the MII, the Ministry of Information Industry. Thatís Chinaís governing body for the telecommunications industry.

Though itís becoming more and more privatized, China isnít exactly the bastion of capitalism. Is there any fear that the trend will reverse itself and the government will begin to re-socialize its industries?

Ed Odenwalder: Not in my mind at all. I donít see any reversal. Itís just too much of a global world these days.

I think, if you spent any time there, itís very clear in my mind that the government keeps sending out constant messages that they are fully embracing Western business ideals, which are formally embodied in the WTO guidelines, which they are moving toward.

If youíre a student of this at all, what you see is itís more likely that the government is going to release a lot of its ownership positions in these large, state-owned corporations. Itís one thing that creates a lot of overhang on their stocks.

On another level, you canít deny itís largely a controlled economy. Their challenge over there is to continue to grow in a way that ensures that there will be continuous stability.

Their concern, then, is letting go of controls that create instability. In my mind, thatís their greatest fear.

Let me make one other comment on this, because this is one of the most interesting things in my mind of doing business over there: the Chinese people are the most capitalistic people I have met anywhere on the planet, and I have been all over this planet.

They are just dyed-in-the-wool capitalists, and I think thereís a good reason for that. Under the Mao reign, youíre very survival might have depended upon your ability to be self-enterprising, taking care of yourself and your family, so these people have developed a resourcefulness that is just amazing. That, coupled with the fact that youíve a society that places a very high value on education, and youíre dealing with a lot of brilliant people.

Theyíre naturally capitalistic and they want the same things we wantógood things for our families. If theyíre not living a middle-class life, they want to move to that. So you have all that natural capitalism coupled with an authoritative, yet changing, government. Thatís why I think China is going to be the dominant economic force for the foreseeable future.

What sort of long- or short-term impact will the Summer Olympics in Beijing have on Chinaís economy, if any?

Ed Odenwalder: Thatís a great question. I donít know if it has any significant impact when I think of the size of their economy, but, for them, I think it has two important impacts. One, it is going to bring so many people to China, and I think those people are going to find that China is much more modern and developed than most foreigners, certainly Americans, recognize. I also think theyíre going to see that the Chinese are really interested and anxious to be a part of the global community, they just have their interesting ways of going about it.

The other big impact, as I read the tea leaves in all the news here, is China really needs this Olympics as kind of a big psychological boost. If you grew up under Mao, you might have self-esteem issues, so, collectively, the Chinese need the world to acknowledge the progress theyíve made.

So, the Olympics isnít so much a financial impact, but itís going to have a real cultural and psychological boost.

Budgets seem to be tightening down here in the States. What about China? Is a recession looming there?

Ed Odenwalder: Iím not seeing anything like that. This is what I have observed during the first quarter of this year: in the beginning of the year, they were kind of sensing they were immune to the global slow downs, in particular the turns in the equity markets, but if you go and look at what is happening in the domestic exchanges, things have really cooled off dramatically. There are slowdowns in stocks and real estate, both of which were overheated in speculative activity. At the same time, if you look at the numbers coming out of Chinese industries, the growth numbers are the same. So things are still booming there.