Exclusive interview for SPINOFF.COM with Mr. Zarzand Alaverdyan about the unique technology which grows sapphires horizontally
HIC & CO s.r.о is a cоmpany which specializes in crystal grоwth using a unique technоlоgy and apprоach. The cоmpany was fоunded in 2011 in Czech Republic. The cоmpany prоduces the biggest size sapphires tо the industrial wоrld using the HDSM methоd (hоrizоntal directiоnal grоwth methоd). Thanks tо the unique knоw-hоw in sapphire grоwth technоlоgy, grоwth machines which are built by the cоmpany in hоuse and utilizing sapphire cutting and pоlishing expertise, HIC & CO s.r.о prоducts are the wоrld number оne in sapphire fields which prоve the exceptiоnal quality.
S.O.C.: Dear Mr. Alaverdyan, we are so grateful for your generosity this day in spending time speaking with us and sharing your insights about your unique knоw-hоw in sapphire grоwth technоlоgy. Our investors and we would like to learn more about your vast experience, your professional background. Could you please share some information about the team members who supported the project?
Zarzand Alaverdyan: I will go through the principal members of the company. There are 4 principal members in HIC & CO s.r.o: Mr. Armen Jegijan, Mr. Aristakes Alaverdyan, Mr. Levon Hovhannisyan and me, Zarzand Alaverdyan.
Mr. Armen Jegijan is the CEO of the company. He is also an engineer by profession. He lives in Czech Republic since 1988.
Mr. Aristakes Alaverdyan is an engineer by profession as well. He is a candidate of sciences in the field of Theory of machine building, this speciality doesn't exist anymore in modern terminology.
Mr. Levon Hovhannisyan is one of the last students of the Professor Khachatur Bagdasarov who was the person who created this method and the concept of growing sapphires horizontally in the late 80s. He was also a receiver of the Lenin Award for his contributions into science and had a meeting with Margaret Thatcher as she was a "crystal" by herself as well. Today Mr. Hovhannisyan is rather a consultant of the company.
And me, the fourth member. My speciality is Marketing and Commerce, specifically in b2b Marketing. My field of expertise is branding and emotional aspect of branding in b2b.
So, these are four principal members of our company. Mr. Armen Jegijan, Mr. Aristakes Alaverdyan, Mr. Levon Hovhannisyan were the people who took the classical 1970s design of the Horizontal Growth Method, adapted and modernized it to the corresponsing modern requirements of the market today. Meaning, the old crystals which were grown using this method were very expensive and very small. Hence, they were not used after the fall of the Soviet Union and there was no real market requirement for them. That's why they took the machine, completely changed the inner architecture, changed the materials used for the machine and the growth process itself, upgraded it to increase the volume and to decrease costs of production and to increase efficiency of the production of the material. In short, they brought it up to modern requirements and new market requirements for the material.
Considering your huge experience in sapphire growth technology, we would like to know whether you had other projects before? Could you please share the story of their creation and success.
In 2004 Levon Hovhannisyan and Aristakes Alaverdyan were a part of a company which was established in Armenia. That was the first time Aristakes Alaverdyan was introduced to the sapphire as the material. Those days Mr. Bagdasarian was also the founding member and the part of this company. So, the first research in development started in 2004. In 2007 that company basically switched to becoming a polishing company. Mr. Alaverdyan and Mr. Hovhannisyan left and started their work in Czech Republic on growing silicon crystal on the same equipment using HDSM method. But since the crash in 2008 of silicon market, they transformed the machine's back into growing sapphires. And in 2011 the new HIC & CO s.r.o was founded as the sapphire growing company. So the experince starts in 2004.
Mr. Alaverdyan, it is so interesting to know more about the process of your technology creation. Please tell us which stage of commercialization your technology currently is on? Was your project funded by any state financing or grants? Has it already received any honors or awards?
The technology itself is already on the stage of industrialization so, basically, it has all the results commercially. But the technology had been influenced by economy scales, that's why a multiplication of machines is required to lower the costs of the production, in order to be competitive in the market in general. Also most of the clients which require such sorts of material have a minimum requirements of the quantity which can not be met with the current amount of machines, which is the presence of our company. So, all the testing and experiments, R&D at this stage are completed. The machine's prototype has been built, tested, approved and some products have also been sold or sent for testing and received a positive feedback from the clients.
Relating the question of state financing, there is a program called OPIT. This is European development program for developing nonindustrialized regions of EU member countries. So far, HIC & CO s.r.o has received 3 grants which it has completed and the fourth grant currently has been approved and has to be implemented. The system of the grant is following - the company invests, for instance, an X amount of money, once the investment is done and the machinery is built (it is supposed to be built by the grant money) and then the state returns 46% of the investments made. So, 3 grants have already been completed and repaid to us and the fourth one is already approved and is waiting for the investments so it can be returned. The fifth grant is on the application.
A company called Yole Developpement is the only company which does market research and analysis of the sapphire market, organized the world's first sapphire conference in Shenzhen, China in 2015. All the companies were supposed to send the certain topics for the discussion. Out of the 95 topics presented, HIC & CO's topic and technology (since it was quite high regarded) was chosen as the speaker, so we were the second speaker at the Forum.
Also we took part in an Expo Conference in Munich in 2013 where the company's progress was highly approved. Basically, they said our company has a great progress and this is something that everyone was waiting for.
It is not a secret that the development of a new technology and its subsequent commercializaton presupposes some problem and addresses unmet needs. Respectively, what problem did you intend to solve by developing your technology? What results did you plan to achieve?
To answer this question we have to go back into the short history. Sapphire as the material was commercially introduced in 1905 by a Swiss company called Geva. They started growing sapphires and selling them for jewelry. The first mass consumer client for sapphire materials was the watchmaking industry. Because prior to using sapphires as windows and watches they were unable to use other materials. As you know, sapphire is the second hardest material on the planet, it also doesn't change its physical properties over time. For example, a piece of transparent ceramics becomes yellow over time due to infrared activity and glass usually (since it's not a crystalic structure) deforms as time goes by. So, the watchmaking industry comercialized sapphire and started using it since 1930-1940s.
The next step in sapphire evolution was military industry which was heavily relied on sapphires, not because they really wanted to, because they didn't have and don't have an alternative material. This was one of the reasons why the HDS method was created in the Soviet Union. Past technologies required very clean raw material. So, the Soviet research facilities needed to create a method for growing crystal material with dirty raw materials, so the crystal would grow and clean itself while growing. Such method was created in the 70s.
Until 2005-2006 the main market for sapphires was precision optics, very specific applications, the military and the watchmaking industry. After 2007 a new trend came to the market. The LED was introduced as a consumer product and became extremely popular as the LED's were chosen as the best alternative to save energy. The LED market had a boom and a sapphire production became extremely profitable. To give you an example how much of a deficit there was, imagine, a 2 inch sapphire wafer which is used as a base for a LED lightbulb was worth about 3.500 USD in 2005-2010. Currently the price of a 2 inch wafer is about 1 USD.
The progress of the material in 2005-2010 went forward and the consumers of the LED and LED producing companies needed to lower the costs to increase the market. The main way to lower the cost of an LED itself was to buy sapphires cheaper. To do this they needed to use bigger wafers. A new challenge came up as LED producers required larger sapphire wafers because to produce an LED wafer they have to pass it through a special machine which makes a second layer. Every launching of the machine is a fixed price, so it doesn't really matter if you put a 2 inch wafer or a 4 inch wafer inside, the price will be the same. So, the larger the sapphire used per process, the more output they would get. Hence, the cheaper the general process would cost them.
Yole and a lot of other analytical companies had forseen that a 2 inch wafer would slowly leave the market and a 4 inch would change a 2 inch, then a 4 inch would be switched by a 6 inch wafer. Because as for the progress it was supposed to go this way.
The current market technology, which was used for it, is called the Kyrоpоlus Methоd or the KY in short. It was sufficient enough for producing wafers up to 2 inch and 4 inch size. The problem started with 6 inches because of the special form of the crystal produced by the traditional method, the effeciency per unit/crystal was significantly dropped. Let's say, if the main product was the 2 inch wafer, the efficiency per 90 kg crystal would be about 60-70 percent. But if the requirement was the 6 inch wafer up to 8, the effieciency per 90 kg would drop down to 5-6 percent but with the same costs. After 2013 the market basically completely stopped. All the final clients of large size sapphires who wanted to switch to 6 inch and still have the need for it, have issues with that as there is no technology that can provide sapphire material at the cost efficient price. That's I am talking about only the LED industry.
When we talk about military industry, for the last 80 years it has been looking for a stable supply of a very large screens. The price for military industry complex isn't an important factor as quality and reliability. There are multiple factors that influence on the quality of the crystal and the current methods which would produce these crystals were not reliable enough or the least could not even produce a stable quantity or needed quantity at all.
So, this is where the technology comes in. Because of its form and architecture of the machine and the crystal itself, it completely solves the questions and the requirements market has today which means the crystals are not made on the basis getting a lot of kilograms. The crystal is grown on the basis how big the surface is. So, for example, in 2014-2015 Apple started a deal with a company GT Technologies. The deal was worth about 1.5 billion USD. Apple was supposed to invest into GT and GT was supposed to build a facility in the United States and supply Apple with the future generation of Apple screens which were supposed to be made from sapphires. The problem happened that GT had promised Apple that their product (the unit piece of the sapphire) would cost about 10 USD. Once 500 million dollars were already invested and the facility was built, GT announced that the price of 10 dollars was impossible and it would range from 90 dollars to 50. What happens after that is the history basically, Apple sued them and GT filed for bankruptcy and that's when story stopped.
In general, the market today requires larger and cheaper sapphires, starting from the LED industry which is the biggest mass consumer market and ending from the military and other special optics applications such as ATM's, scanners and other multiple fields where sapphires are used.
As far as we understand, nowadays sapphire crystals are grоwn by a variety оf traditional methоds that are used worldwide but all of them have some drawbacks. That's why understanding the USP from the investor's side could make the technology #1 for them. What are the USP of your technology and fundamental difference from other technologies that are trying to solve this problem?
All the technologies have their pluses and minuses. Let me start from the drawbacks of our technology and then I’ll go onto the pluses. The only thing this technology currently cannot do is make very thick crystals. For example, why the KY method became the main market standard prior to our method was because the main market for big sapphires was military and they wanted domes for their rockets. So they were three dimensional domes which they would place on the head of the domes for missiles (I.e cruise missle and etc). Our method has a limitation on thickness.
There is another method called the EFG (the Edge-Defined film-fed methоd) or Stepanоv Methоd which grows a specific shape of sapphire. For example, if you require a tube, they grow a tube, they don’t grow a big piece of chunk, then they cut a tube out of it. The drawback of this method they cannot grow up optical material at all. They grow mechanical pieces with quite low quality.
Our method’s primary difference is that the crystal is grown horizontally. All the other methods grow their crystals vertically. Also the basic shape and the form of the crystal is completely different because, for instance, the KY method makes a big ball, they are so called, it’s a 90-250 kg big piece, round-shaped crystal which is oriented A. Out of that crystal they cut out pieces of the products which they require and throw away the rests.
The KY growth speed is about 1 mm/hour. And our method makes maximum 40 kg per process but with the growth rate of 10mm/hour. So, by the end of the month our method and the KY method makes the same amount of output but with higher efficiency, better optical quality. And we grow our crystals based on the characteristics of the clients and what they want because we have the ability to modify the crystal prior to growing it as everyone else has to grow it first and then cut it out. So we save a lot of money on that.
In the video below you can see the technology that grows sapphires vertically. It allows to grow up to 250 kg big crystal ball, out of which different shapes can be cut and the rests will be thrown away.
Also the crystal grown horizontally doesn’t have issues with so called pressure points which means it grows on the same horizontal plane, the crystal doesn’t have any parts which are higher or lower. It’s a little bit difficult to explain this over skype or phone, it is better to see on the physical unit. Crystals which are grown horizontally always come out optically because the method in general cannot produce crystals of lower quality. The price, the costs of production are almost the same but the efficiency per unit is radically different using our technology.
The best case scenario in the KY method is that inside of the 90 kg crystal there is 30 kg of the heart of a crystal, this is the largest piece of high quality. So they spend 14 days to take out the 30 kg when we spend 7 days to grow exactly only the heart.
Also our crystals are square shaped which means geometrically we save a lot of material when cutting out, for example, windows.
One more advantage is that the HDS method was created for growing different types of laser elements with and without dopping. The list of crystals that can be grown using our method are YaG laser crystals with different doppings, Ti Sapphires, Rubies, Emeralds and etc.
YaG (neodymium-doped yttrium aluminium garnet) is a crystal that is used as a lasing medium for solid-state lasers. It is one of the most common types of laser that is used for many different applications. It is widely used in medicine to correct posterior capsular opacification, for pan-retinal photocoagulation, to treat eye floaters, for laser-induced thermotherapy, to remove skin cancers, to treat benign prostatic hyperplasia. It is extensively used in the field of cosmetic medicine for laser hair removal and the treatment of minor vascular defects such as spider veins on the face and legs. YaG lasers are used in manufacturing for engraving, etching, or marking a variety of metals and plastics, or for metal surface enhancement processes like laser peening. They are extensively used in manufacturing for cutting and welding steel, semiconductors and various alloys. The YaG laser is the most common laser used in laser designators and laser rangefinders.
We would like also to express gratitude for bringing and showing crystals to Alexander Miller personally. He said that they really look amazing.
Those two crystals that he had seen the smaller one is our first prototype, which we had started with, and the second, larger one is our second generation crystal. The third one, which the investment is intended for, will be three times bigger than the one Alexander had seen.
In order to understand the peculiarities of this particular spinoff our investors always ask what is the investment structure of the company? Do you still own the controlling stake in your spinoff?
Yes, we own the controlling stake. We own the majority, about 60 to 70 percent of the company.
Mr. Alaverdyan, we wonder what is the actual addressable market currently for your crystal growth technology and what are the current competitors at the market?
It’s quite difficult to pinpoint exactly what the size is because the sapphire market in general is a very niche b2b market. From the figures that are more or less available, the LED market by itself, only in China last year was estimated to be around 75 billion USD. That’s the price of the end product LED. In the costs of a single LED unit the 30% is the margin of the sapphire material that means completely polished and ready to sell crystal. We roughly calculate from the price of the general market about 5% is the market of sapphires, only for LED’s that would be around from 5 to 6 billion USD. The military market is very difficult to give a number of how expensive the military market is because the figures are not available for public. I can tell you what military hardware utilizes sapphires but none of the major military producers usually announce how much they sell and what the number is. Sapphires are used in submarines, tanks, APCs, avionics, satellites, almost every place that requires the special physical properties of sapphires because sapphires have special ability which no other material on the planet currently possesses. It is a very strong material, it has the best optical qualities in UV and infrared transmission, plastic deformation and melting point is 2150 degrees it’s one of the best conductors of heat but at the same time it’s a dielectric, for medicine it is none allergic, its polishing is so high that bacteria and dirt don’t stick to it, it’s also one of the reasons why watchmaking industry and smartphones use sapphires screens. If you have the latest model of an IPhone, your button and the lens are both made from the sapphire.
So the application of the sapphire is very extensive and it could be applied almost in all the spheres.
Well, yes. Currently about 145 bones in the human body can be substituted with sapphires. In medicine they use them for shields for lasers, if they have a special laser, they put sapphire screens in front of the laser to defend it. It’s used heavily in military. Actually, it is used in any place that has a lot of interactions with scratching a screen, etc., for example, against vandals sapphire screens are put on ATM's so nobody scratches it or if anyone paints it, it is easy to clean. And the main thing it’s almost impossible to break.
The potential investors will be curious whether you already have the first clients and signed contracts? What was the feedback from your partner's markers and customers?
We spent the last two years basically on the sales process of sapphire materials. We shipped samples to our clients. It takes about 5 to 7 month to check the product and then they give us their feedback if they want it or not. Among the companies we’ve sent our products to and we also attended tender on them, is a company called Schott AG, a German-Swiss company which is the leader in the areas of specialty glass and glass-ceramics. Schott is an innovative enabler for many industries, such as home appliance, pharma, electronics, optics, life sciences, automotive and aviation industries. They sent to us their feedback that our material is of extremely good quality and orally they confirmed that our company won the second place in their tender, not the first place because it was the first time that we were participating in a tender.
We also communicated with Apple, we visited their central office in Cupertino where we presented our technology and our products to them. Our conversation with them actually didn’t stop but stood in place after because of the last experience they had with GT Technologies. They said that they require us to multiple the technology at least to the level that we could supply them with the IWatch material and then we could speak with them about larger deliveries for IPhones and IPads.
The other notable client is an Israeli company called Gavish, the largest polishing company for military and civil applications. One of our other clients is Hayek Group which is the owner of the Swatch Group. And we also sold for two multiple international companies which are specialized in a sapphire applications. Out of most of them these are the most notable.
Dear Mr. Aladerdyan, we both know that for you and the investor it is crucial to reach positive cash flow as soon as possible. Certainly, the market scaling cannot be achieved without proper distributors network and clients. Please tell us about your criteria of partners selection and which markets are open for spinoff activity.
Well, basically as I said the sapphire market is a very specialized b2b market, the clients are numerous. But principally because our company and the investment would be intend to put into a company they are mainly focused on producing sapphires and grinding and cutting them to sell already stake which could be sold to polishing companies. Because most of our clients themselves are either polishers or companies that could do the rest of the process themselves.
Anyone can invest and find something in it, for example, it matters what industry they are in. Our technology is unique for large size sapphires or industrial scale sapphire production or IWatches but the scale would be much larger for regular screens. The distribution channels are usually long-term agreements and regular b2b sales, there is not really much I can say about it. Because HIC & CO s.r.o is located in the EU, we basically have almost no limitations to where and whom we can sell the product. Currently, for instance, because of the tensions with Russia and certain sanctions, direct selling to Russian companies which require our products is impossible. So the mechanisms of sales are a bit more complicated. But generally in the rest of the world there are no limitations on selling.
As you’ve mentioned before HIC & CO had communications with Apple about producing sapphires for screens on IPhones, IPads. And it is very important to understand your particular vision about unique features of your company. Why do you consider the major market players might be interested in investing into a promotion of your technology? We are not talking about Apple investing into the promotion but the major market players.
There are multiple reasons. The main reason is because the method can produce sapphire crystals at the cost which is about 3 to 4 times cheaper than the top sapphire market producers offer. The production costs might be the same of the crystal itself but the output per unit of the crystal is far higher that anyone at the market could offer. And the sizes which we currently can make are unavailable by anyone today. The current price of sapphire in the market today is almost on breakeven for all the current market leaders. For us, the current market price, for certain products, is minimum from 50 to 60 percent profit. If we start selling our material with the decent profit about 20-30% in the market, everyone else will be out.
Now we would like to refer to the next very crucial and we would even say essential aspect for spinoff companies’ as the strategy of R&D, production, distribution and marketing processes. Do you have your own unique strategy? Which of these processes do you consider your spinoff is strong at?
Right now we are done with the research and development, there are certain fields we will continue to do R&D to increase efficiency and so forth. If we talk about marketing, we have pretty much access to the majority of consumer companies which buy it, but we do not have access to military producers in the States for multiple reasons, one of them is that they do not really participate that much in European or Asian Expo’s. All in all, our company is good at building the machines, producing well, selling and doing more research.
As a rule, the majority of spinoffs outgrow into exits. How do you determine the market for your product/technology and estimate its volume and dynamics? What is your potential share on the market? How do you think what market cap your company plans to reach at the peak of its development and why? How much time this process might take?
It’s more or less guessing. The peak of the technology, with the way the market is currently, realistically if there are enough machines, just to give you an example, the Chinese company called Harbin Aurora and the Russian company called Monocrystal which make sapphires, they are the leaders right now in the world. Each of them alone has about a thousand machines. But both of them are struggling heavily because of the current cost of the prices of sapphires in the market, they are working almost on breakeven.
With our technology we will be able in next 2 years with the amounts of machines intended with the first tranche of the investments for 10 million, we see that we can heavily define our position in the market, take the clients which want large size sapphires (for 80-90% take that market) and with further expansion we can slowly push out all the other market players. Because we know quite well what is the maximum potential of the alternative methods are and they are pretty much stuck. And they’ve been stuck for at least 5 years so we don’t see any way that could compete with us if we have enough multiplication of the machines. Our company might be the monopolist at the market with such potential clients like Apple, etc. and might be a kind of a "unicorn" with a market capitalization of 1 billion dollars.
For spinoff companies their intellectual property is a key to success. The investors pay particular attention to it. What key intellectual property does your company have (patents, patents pending, copyrights, trade secrets, trademarks, domain names)?
No, we don’t have patents at anything. Since we are a small company and once we apply for patents and patent the technology and someone in China starts copying the solutions and innovations we’ve using, we don’t have the financial means to sue such companies. If you know, BMW and Mercedes were not able to sue the company which literally copied their product in China and we don’t have that potential right now.
We have about 37 different elements inside the machine which are patent ready and can be patented. But we think that it is safer not to patent the technology because some of the solutions are quite unique and simple at the same time so copying them would be quite easy.
The investors will want to get a clear picture of how many rounds of investments have you completed? Are you seeking for the investments at the moment? What is the volume and time limits? What milestones will the financing get you to? What did you plan to use the invested funds for?
I am going to give a rough estimate number right now. About 7-8 million USD has already been invested into R&D and building the machines and that’s not considering the grants we’ve had. We are still looking for a potential investor to do the multiplication of the last generation of machines. We usually see it as the first stage because 10 million is calculated on the amounts of machines and polishing equipment which will bring the optimal costs of production for the technology which means having one machine and having 15 machines most of the costs are the same. The same amount of employees is employed for 1 machine and for 15 machines. So having 15 machines is on the economy scale heavily influences on the competitiveness of the product and general price and costs of production.
What about the amount of the investment you are looking for right now?
We are currently looking for 10 million euros. That’s the ideal amount we would want right now. There can be the scenarios with 20 million euro and there can be the scenarios with 7 million euro. I mean it really matters if the investor has any specific agenda why he wants this or if he just wants to invest only because it’s a good technology. It is quite different. For example, is it a military/hardware producer or he wants to take part in the process or he is a company like Apple and he wants to supply to Apple, he would have to invest a hundred million dollars to be able to supply to Apple because the amounts of machines required to be able to supply to such company is that much. So we’ve calculated the 10 million basis on the military market and these are most lucrative markets for our technology where we have absolutely no competitiveness and we can sell at the highest price.
Could you please describe your ideal investor? What aspects are important for you, for instance, is it experience, country, or maybe some personal qualities?
We always want the investor who has ambition to get something more. Because as I said the technology’s potential is to monopolize the market completely, do the revolution. If we have a large enough production, we can lower the price of sapphires to a degree that new markets arise and which will start using sapphires and haven’t used sapphires before because sapphires were extremely expensive. The moment when Apple started using sapphires in their products, the general sapphire market had already started getting a deficit because it’s a unique material with unique properties and many industries want it and many industries can’t afford it. So the lower the price and the more we produce the more markets we can start substituting current materials with sapphires. So ideally we want someone who has the ambition of transforming sapphires into a mass market product and making it the next glass.
Today regionally the main markets for military application is the western hemisphere, the United States, the EU, Japan, and China. Ideally we would not want the money to come from Russia because of the current political situation as sapphires are dual purpose products, military and hardware producers don’t want to have any Russians involved in their supplies. So it’s kind of a political issue. Besides that we don’t have any requirements.
What about the amount of own private capital of the investor? You told us that HIC & CO s.r.o. is looking for the investment of around 10 million euro. What if the investment company will have a little bit lower possibilities? Is there any option for it?
Yes, there are options for it. We can go down to 7 million. Currently we have a group of the investors which are interested in investing up to 4.5 million euro and they are open for cooperation with anyone else who wants to invest into the company.
At the moment, they haven’t invested yet but they plan to do in about a month or a month and a half, so there is an opportunity if anyone wants work with them but we don’t have any obligations towards them at this stage yet.
So these potential investors are planning to participate in the round?
They can if there is a need, it is based on the amount offered. If an investor has a full 10, there is no point in bringing in the third party.
And the last question, could you specify the most convenient way you would like to receive inquiries from potential investors? Should it be by e-mail or personal phone call?
Email is always more preferable because by phone sometimes we might be unreachable or the connection might be poor.
We would like to express gratitude for the time you have dedicated to this interview. SPINOFF.COM will observe the development of your spinoff with great pleasure and interest. Also, we are thankful for providing all the necessary materials. We are pleased to forward all potential investors the database of the spinoff supportive materials such as presentation materials, schedules, videos, pictures, figures, blueprints, text materials etc.