More Prizes for Innovation

Stephen DeAngelis

February 22, 2007

Last month I wrote a post about InnoCentive, a company that makes money by charging clients looking for solutions (“seekers”) to post problems on a Web site where problemsolvers are offered cash — usually less than $100,000 — to solve them. Google is picking up on this idea and raising money to fund the non-profit X Prize Foundation which will offer considerably more than a hundred grand, according Matt Richtel writing in the New York Times, to provide solutions to humanitarian challenges [“Silicon Valley Meets ‘American Idol’ With Prizes to Inspire Inventors,” 16 February 2007].

“Venture capital firms are considering contests that offer competing engineers and entrepreneurs multimillion-dollar prize purses if they come up with innovative technologies in various industries. The concept is getting an introduction on March 3 at a fund-raiser at Google. The event is intended to raise a chunk of $50 million to operate the X Prize Foundation, a nonprofit group that already has awarded $10 million to designers of a private spacecraft. The foundation plans to use the money to develop prizes in fields like medicine, poverty reduction and fuel-efficient cars. But the foundation’s next stage of prize-giving will also include partnerships with venture capitalists who, the group argues, can use prizes to spur entrepreneurs to innovate and, in turn, to create an efficient research and development machine. ‘Prizes can help create markets,’ said Tom Vander Ark, president of the X Prize Foundation. ‘It’s an interesting twist on venture. Instead of betting on a company, they can bet on a sector.’ The X Prize foundation, whose board of trustees includes Larry Page, a co-founder of Google, and Elon Musk, a PayPal founder, has been asking venture capitalists to donate money for prizes and to consider more formal partnerships. Such partnerships, Mr. Vander Ark said, could involve giving money in exchange for an option to buy equity stake in the prizewinning companies.”

Innocentive counts on self-motivated problemsolvers to use their spare time to address challenges posted on its Web site. X Prize Foundation is counting on fiscal motivation (potential profits) to encourage companies to focus precious corporate resources on challenges that could improve life for everyone on the planet. Getting money from venture capital groups to fund the prizes, however, may prove difficult.

“The concept … has engendered some skepticism. Prizes may be of limited value to venture capitalists, who ultimately are less interested in groundbreaking science than they are in concrete and market-ready technologies, according to some technology investors and academics. ‘There’s no market merit to any of this,’ said Paul S. Kedrosky, executive director of the William J. von Liebig Center, which studies venture capital trends. He argues that the prizes might be good for generating press, or buttressing the egos of donors and winners, but not particularly valuable at leading to profit-capable companies. ‘It’s a naïve assumption that good science is good business,’ he said.”

Richtel notes that offering prizes for innovation is an old idea that goes back hundreds of years. He also notes that other groups are offering prizes for solutions.

“Prize-inspired entrepreneurialism … is a concept that goes back hundreds of years. And there have been a number of recent examples. Al Gore, the former vice president, and Richard Branson, the British billionaire, announced last week a $25 million prize for development of technology to reduce greenhouse gases. In October, Netflix, the online movie rental store, began offering a $1 million dollar prize to spur development of a system that can better predict what films consumers might like based on their previous viewing habits. For their part, venture capitalists have used prizes on a limited, albeit modestly growing, basis as a way to prompt engineers and scientists to articulate their ideas in marketable terms. Several venture firms, including Polaris Venture Partners, have sponsored an annual $100,000 business plan competition at the Massachusetts Institute of Technology. In 1998, Akamai Technology, whose software is used to route Internet traffic efficiently, didn’t win the M.I.T. competition. (It finished in the top 10.) But it did get the attention of both Polaris and Battery Ventures, which invested in the company and later helped take it public. More recently, Advanced Technology Ventures, Atlas Ventures and General Catalyst have financed a $100,000 prize in the Boston area to be awarded to the best business plan related to alternative energy. The idea is to spur innovation and give the venture firms a chance to see prospective technologies and business plans ahead of other venture investors, said Wes Raffel, a partner with Advanced Technology Partners.”

The article concludes by quoting the skeptics who believe that those trying to raise money for large prizes, funded by venture capitalists, will likely be disappointed unless those putting up the prize money have guarantees that they can invest in the products or companies that win. It looks like philanthropists may continue to have the leg up in this area since altruism, rather than profits, motivates them.