Sunday, February 18, 2007

Prizes rising

Friday's New York Times had a story on the rise in prizes as a philanthropic tool. The article focused on the X Prize - which has already awarded a $10 million prize for space travel and is raising funds for solutions to poverty, health and other social challenges. Richard Branson notably announced a $25 million prize for solutions that can remove carbon from the atmosphere. MIT, Yale and other universities (often in conjunction with venture capital firms and investment banks) hold annual "business plan contests."

What are prizes good for? The Times article presents the point that they are good at providing incentive to innovation, though not necessarily the right tool to find sustainable businesses. It quotes Paul Kedroskey:

“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 naive assumption that good science is good business,” he said.

Prizes also favor entrants who can pay the costs of participating themselves - as prizes are awarded after something is created and no capital is provided to prototype or try something.

The Times has run other articles on prizes as ways to foster innovation. The X Prize is certainly an interesting blend of philanthropy and venture finance. It is one more sign of how the traditional divides between market and social solutions are blurring and is itself a compelling example of new social finance tools. But prizes are not the answer to every challenge. Just as Kedroskey argues they may not find good businesses, prizes also won't find solutions from those who cannot afford to participate in the contests.

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