Case Study: Universal Hydrogen

Case Study: Universal Hydrogen

By Rishab Balakrishnan | Connect on LinkedIn

September 4th, 2024 | 3 min 20 sec read

1. What Universal Hydrogen Did Well

Universal Hydrogen advanced the decarbonization of aviation by developing a modular hydrogen delivery system that retrofits existing aircraft with hydrogen fuel cell powertrains. This innovative approach circumvents the need for immediate new infrastructure and is particularly strategic in an industry often resistant to change. By demonstrating hydrogen-powered flight in 2023, Universal Hydrogen proved the viability of clean energy in aviation, positioning itself as a leader in reducing aviation emissions.

Its partnerships with industry leaders like MagniX and Plug Power were central to Universal Hydrogen's strategy. The collaboration with MagniX, a developer of electric propulsion systems, enabled the integration of advanced electric motors into hydrogen fuel cell powertrains, enhancing the efficiency and performance of retrofitted aircraft. This partnership demonstrated that hydrogen fuel cells and state-of-the-art electric propulsion technology offer a credible alternative to traditional jet fuel, addressing both performance and sustainability needs.

The alliance with Plug Power, a pioneer in hydrogen fuel cell technology, was similarly critical in developing Universal Hydrogen's modular hydrogen delivery system. Plug Power's expertise provided the technological foundation for scalable and reliable hydrogen powertrains. Together, these collaborations have created a more robust ecosystem for hydrogen-powered aviation, underscoring the feasibility and scalability of hydrogen as a clean fuel. These partnerships were a clean driver in the company's ability to raise a $62M oversubscribed Series A, led by major Airline CVCs.

2. Burn Rate Estimates and Financial Analysis

Based on our team’s estimates, Universal Hydrogen’s burn rate began at approximately $1.5 million per month (driven by headcount) in early 2020 and rose sharply to around $10 million per month by late 2023. This rapid increase in spending aligns with the company’s efforts to expand operations, attract investors, and prepare for commercialization. However, this aggressive strategy appears to have been unsustainable, leading to difficulties in securing further funding.

Revised Burn Rate Estimation:

• Early Burn Rate (2020): ~$1.5 million per month
• Peak Burn Rate (Late 2023): ~$10 million per month
• Average Burn Rate: Approximately $4.5 million per month

Initially, Universal Hydrogen would have likely maintained a conservative burn rate of around $1 million per quarter for the first six quarters, reflecting its early-stage operations and lower costs. After the Series A funding round in Q2 2021, the burn rate increased to $2 million per quarter by Q4 2021, indicating the company's scaling operations and increased research and development efforts, particularly in headcount. The Series B funding in Q4 2021 would have marked a more aggressive phase, with the burn rate climbing in linear increments to reach approximately $6 million per quarter by Q4 2022. Following Early Stage VC funding in Q4 2022, we believe the burn rate escalated even further, reaching up to $13 million per quarter by Q2 2024. This surge reflected intensified efforts to scale operations, advance technology development, and prepare for commercialization, possibly to build the competitive IP needed for a subsequent raise.

To align the total funds raised with the cumulative burn rate by Q2 2024, our model adjusted the burn rate incrementally across these funding periods. This ensured that by mid-2024, all $90.47 million in capital raised was expended, leaving no remaining investment. This analysis underscores the critical need to match burn rate with available funding and illustrates how aggressive scaling and expenditure without corresponding revenue generation can rapidly deplete capital, leading to financial instability and eventual bankruptcy.

3. Why the Company Failed to Secure Further Funding

While Universal Hydrogen cited systemic issues with securing hydrogen supply and political challenges, other hydrogen tech startups, like ZeroAvia and H2Fly, have successfully raised funds and continued operations despite similar market and regulatory conditions. This discrepancy suggests that Universal Hydrogen's challenges were not solely due to external factors but also to internal management decisions.

Key Factors in Universal Hydrogen’s Failure:

1. Overemphasis on External Challenges: Universal Hydrogen highlighted external factors like hydrogen supply issues and regulatory hurdles. However, the success of competitors in securing funding and progressing technology suggests these challenges might have been overstated or not managed well internally.
2. Aggressive Burn Rate: The escalating burn rate, especially toward the end, points to a possible miscalculation in financial strategy. The hiring of a CFO in 2023 was likely a reaction to these financial pressures, aiming to control costs and present a stronger case for funding. However, this intervention came too late, and the rapid increase in expenditures without sufficient revenue or additional funding hastened their decline.
3. Leadership Instability: The resignation of CEO and Co-Founder Paul Eremenko shortly before the company ran out of runway indicates potential leadership issues or internal disagreements on strategy.

4. Takeaways

Universal Hydrogen's downfall illustrates the critical need for startups in the hydrogen and clean energy sectors to balance innovation with financial discipline. While the company pioneered advancements in hydrogen-powered aviation, its aggressive spending and overestimation of external challenges, coupled with internal management instability, led to its collapse. Startups must carefully manage their burn rates, realistically assess both internal and external risks, maintain strong leadership alignment, and remain adaptable to market realities. Effective communication with investors is also essential to building trust and securing the necessary funding for sustainable growth. Universal Hydrogen’s experience serves as a valuable lesson on the importance of strategic planning and governance in scaling hydrogen technologies.

References

• Universal Hydrogen. (n.d.). Universal Hydrogen - Wikipedia. Link
• Universal Hydrogen. (n.d.). Official Website. Link
• PitchBook. (2024). Universal Hydrogen Company Profile. Link
• Flight Global. (2023). Universal Hydrogen names first CFO. Link
• Aerotech News. (2023). Universal Hydrogen flight test. Link
• Aerospace Testing International. (2023). FAA Approvals for Hydrogen Aircraft. Link
• GeekWire. (2024). Universal Hydrogen's Shutdown. Link
• Hydrogen Insight. (2024). Universal Hydrogen's Bankruptcy. Link