What makes leaders effective in an environment that is rapidly changing, volatile, and unpredictable? And what makes those effective leaders get the most out of life?
January 14, 2014
The Power of Prizes
Prizes have existed since the dawn of man. As modern civilization grew, they become a tool for incentivizing progress. Yet, it was only in the past few centuries that we came to view prizes as some of the most effective—and overlooked—tools for incentivizing breakthrough solutions.
Prizes are wrapped up in a quest for prosperity and economic growth, which in turn depends on the development of new ways of working, living, and thinking—in short, innovation. We need ways to incorporate more market gain into the personal incentive to innovate. Intellectual property does so by rewarding innovators with ownership of their work and a share of its value over time. Prizes also act as incentives by bringing forward a share of future gains from innovation into the present while releasing ownership of the work to the public.
What sets prizes apart is that they are applied to opportunities, both large and small, where a breakthrough seems within reach with just the right “kick.” By blending public aims with private initiative, prizes are able to “tap a primitive urge to win, and to be seen winning,” in order to make great things happen.1
By better understanding innovation prizes, we will begin to see why they may be more needed now than ever before.
WHAT’S THE HISTORY OF PRIZES?
Homer’s Illiad sets out one of the first descriptions of prizes in history. We see Achilles atop a funeral pyre, calling on his men to compete in honor of Patroclus, whose death he would glorify through sport. He proclaimed prizes of gold and horses, and “once Achilles finished speaking, swift charioteers rushed into action,” for they were “keen to win.”
We may be long past the time of Greek myth, but in more modern history, we have seen prizes spur action in surprising ways, none more so than with the great European contests of the 18th and 19th centuries. Over the course of the 18th century alone, prizes funded more than twice as many scientific efforts than were paid for by grants.2 And things were just getting started. William Masters and Benoit Delbecq write that “the early 20th century saw an even greater burst of prizes for breakthroughs in transportation and civil aviation, financed by newspapers and others.”3
Yet, these gains were short lived. A rising tide of government largesse in the wake of the Second World War soon swamped prize funding and relegated it to obscurity. Moreover, increasing amounts of research money were going to large-scale projects in the national security sphere that had little need for the publicity that prizes brought. It was not until the late 1970s that private funding of research and development (R&D) began to break away and rise above the levels of federal support.4
By the 2000s, large amounts of private capital were available to a growing range of innovative endeavors, proving to be a fertile ground for the further development of XPRIZE and others. Foundations were established to channel research funds toward social goods. Moreover, governments were searching for new ways to fund applied research beyond the simple grant-making framework.
Prizes are an idea whose time has come again.
WHAT ARE PRIZES, EXACTLY?
Prizes encourage innovative activity in pursuit of relevant problems. Sponsors articulate the challenge and the terms of success, and the innovator assumes the cost and risks while enjoying relative freedom in finding a solution. What matters most of all is that anyone can compete and win—the only thing that matters is performance.
Why compete? The biggest lesson from across centuries of contests is that people strive for attention as much as they do for the money. If it weren’t for both non-monetary and monetary incentives working in union, we wouldn’t see, for instance, the contestants of XPRIZE spending more than ten times the sum of the prize purse in order to claim it.5 Prize monies mostly serve to get innovators to the point of action—to meet their “natural investment threshold.”6
The democratic nature of prizes can stimulate a high degree of competition, often from surprising corners. Contestants range from companies and academics to entrepreneurs and garage-bound tinkerers. Sponsors are able to tap into these diverse pools of creativity and reserves of fresh ideas that they may not have been able to previously identify. As Bill Joy of Intel famously remarked, “No matter who you are, most of the smartest people work for someone else.”7
Prizes then are marked by boldness and tempered by reality, while avoiding the prescriptive focus that marks grant programs.8 No wonder the solutions are often just as unexpected as those in pursuit of them.9
ARE PRIZES SUCCESSFUL?
Prizes infuse the spirit of competition into efforts bent on addressing market failures and adding to public knowledge. Problems that were once ignored are given new life within a market-driven framework. Or consider the spillover effects alone. The human-powered Gossamer Albatross, which won the Kremer Prize in 1979 for its flight across the English Channel, helped demonstrate and lead to the adoption of Dupont’s Kevlar composite and many other now-vital synthetic products.10
A recent study offers the most substantive case for prizes leading to innovation. It reviews nearly 2,000 prizes awarded by the Royal Agricultural Society of England (RASE) over a one-hundred-year period, from 1839 to 1939.11 Those who won the prizes were much more likely to receive and renew patents, and doubling the prize purse led to upwards of a 33% increase in patented innovations. Even those who lost their contests cumulatively received more than 13,000 patents. As one British journal remarked in 1867 about the RASE prizes, “It is indisputable that these competitive trials have done, and are doing, much to raise agricultural engineering to the highest standards of efficiency and economy.”12
A more recent study of the crowdsourcing platform Innocentive found that its community of problem-solvers succeeded in winning 30% of the prizes on offer. These were hundreds of problems that quite often had stymied the research labs of leading companies and nonprofits.13 According to Innocentive, roughly 85% of the 1,700 external-facing challenges that it measured were successful, with credit going to their methodology and approach.14
WHAT’S THE MARKET?
The market for innovation prizes has grown dramatically over the past decade. Yet, it is surprisingly difficult to know for certain just how large the space is.
McKinsey’s 2009 report on philanthropic prizes boasts the most accurate (if not the most up-to-date) data yet. According to the consultancy, the current prize sector is sized somewhere between $1 billion and $2 billion, with cumulative prize pursues having tripled during the 2000s to $375 million.15 Viewed over the span of the past four decades, prizes have enjoyed a 15-fold growth in value—much of these funds are from the private sector.
Since the time of McKinsey’s report, there has been a massive rise in the government use of prizes, particularly with the U.S. Congress’s passage of the America COMPETES Reauthorization Act in 2009.16 Whereas in previous years only NASA and the Department of Defense enjoyed the authority to commission and implement prizes, now every federal agency can assume the lead role in sponsoring a prize.17
While the public sector has moved more energetically into the prize space, traditional approaches toward incentivizing innovation have remained. Prizes continue to function as a compliment to other funding mechanisms, such as grants, and incentive structures, such as patents.
Much of the low-hanging fruit of innovation has already been plucked, particularly for prizes. The challenges that remain fall into two categories: the complex problems requiring large, cross-disciplinary teams, and those pushing for discrete, small-scale advances that are primed for crowdsourced solutions.
No matter the realm in which prizes are applied in the years to come, the most remarkable advance may well be how normal or obscure they become. That may pose challenges for creating publicity, but it will do wonders for establishing prizes within an institutional framework for spurring innovation.
We will likely see a greater trend in the outsourcing of research and development as companies look to balance scarce resources with greater needs for innovation. Similarly, we will see more reasons for the growth in public-private partnerships as agencies attempt to leverage greater investment and outsource key activities.
It is in the private sector where we will see a diverse range of prize structures and applications arise. There’s a much wider variety of applications and actors in the private marketplace, all while the increasing scope of technological gain increases the reward from innovation.
Prizes have long been more potential than reality. With a well-informed application to the most pressing challenges in innovation, prizes may soon become a more common way to incentivize our most inquiring minds. What makes prizes so compelling today is that while we live on the innovation frontier with vast possibilities ahead, all we clearly see is a present humbled by the past. Where moon shots once lit up our skies, we’re left gazing down at our smartphone’s soft glow. Prizes open the imagination to what is unseen.