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Thursday, May 21, 2009 | It has been proven through the ages that a great way to motivate human beings to reach their highest potential is a prize. It could be a gold star sticker, a salesman of the month plaque or a Nobel, it doesn’t matter. Offer up a symbol — and preferably some cold hard cash — to mark the achievement and people work harder.
In recent years entrepreneurs have increasingly exploited this basic aspect of the human condition and created big-money, super-hyped prizes designed to achieve society-changing breakthroughs. Among the fruits of these so-called “inducement” prizes have been private space travel, and innovations in robotics and genetic research.
Now Del Mar-based entrepreneur Lee Stein claims to have devised a system of prize-giving that he says will not only lead to more breakthroughs, but entire industries, and a badly needed new venture capital model. Stein calls the investment fund he is forming around his idea PrizeCapital, and the concept “venture philanthropy.”
The concept has some tech watchers excited about the possibility of a new funding avenue for innovation at a time when the traditional structure is crumbling. Others are a bit more skeptical, including a prize industry expert who suggests that PrizeCapital could end up creating more media hype than world-changing technologies.
PrizeCapital’s first $10 million prize will go to the winner of a competition to develop a process for making algae a commercially viable biofuel. In addition to eventually awarding a $10-million prize, the fund will first provide seed money to competing groups so they can afford to not only design and build their prototypes, but also write and file patent applications, a crucial step toward making an idea financially viable.
In exchange for the seed money, the competing groups agree to allow PrizeCapital to be a tag-along investor if their idea shows promise and attracts a lead investor. The benefit to the fund is that it has the opportunity to get a piece of every start-up in a newly created technology cluster.
“We make it financially attractive to create innovation and capital for social good,” said Stein, who would not name his investors or how much he has raised. “And we have a diversification system designed to bet on every horse in the race.”
If PrizeCapital is successful it will earn a place in what has been described as a renaissance of prize-giving. Prizes have provided the impetus for some of mankind’s greatest achievements, from creating a measurement of longitude at sea to Charles Lindbergh’s flight across the Atlantic Ocean.
And since 2000, more than 60 prizes — with prize money topping $250 million — have debuted, according to a report by the consultants McKinsey & Company. McKinsey estimates that the entire prize sector could be worth $1 billion to $2 billion.
Stein’s concept has few out-and-out detractors, and industry insiders say any possible solution to the broken venture capital model is welcome. A decade ago venture capital funds happily invested in a wide array of emerging technologies, confident that they had a decent chance of cashing out in an initial public offering.
But two stock market crashes inside a decade have all but closed off that exit strategy. Venture capital-backed IPOs dropped 90 percent from 2007 to 2008, and venture funds have become increasingly conservative in the face of the current recession. As a result, startups, especially in the biotech industry, have an extremely hard time attracting investment capital.
“Anything that adds money to this space is good,” said Duane Roth, the CEO of Connect, the local technology industry association. “Putting together a proof of concept is expensive and often a barrier — it is not something that most scientists and engineers can fund out of their pocket.”
Yet Roth is not convinced that the PrizeCapital concept will adequately replace the old venture model. Especially, he says, if it continues to focus on well-established innovations such as making algae a biofuel. There are already dozens of companies working toward turning the plant into a viable alternative to fossil fuels.
James English, a University of Pennsylvania English professor who has written a book on the prize industry called “The Economy of Prestige,” said PrizeCapital represents a new category of players in the prize industry which he dubs “prize facilitators.” English said that while there is no particular harm in giving a prize, it is important that people see the process for what it is.
“Those people are making money by putting deals together,” English said. “They are getting maximal press exposure, and soft coverage, for a very small outlay of money — prizes are a really cheap way to get a lot of publicity.”
Stein does not shy away from acknowledging the profit motive of his venture, but he said that the PrizeCapital has the potential to help the world’s neediest in ways that no other current models do. “This is the beginning of a completely new way of investing,” said Stein, who in 1994 co-patented an internet-based bank payment system that he said was the world’s first, and is a past chairman of the San Diego Stadium Authority and Seaport Village.
“Rarely does a venture capitalist say I want to solve a problem, let me go find everybody in the world who might be able to solve it.”
Stein chose algae because he sees a future in which greenhouse gas emissions from the developing world cancel out any environmental progress made by the United States and other developed countries. The only option, as he sees it, is to quickly develop a fossil-fuel alternative that can be utilized by “the poorest 2.3 billion.”
The inspiration for PrizeCapital came through Stein’s involvement with the X PRIZE Foundation, which brought prize-giving to a new level in 2004 when it offered the $10 million Ansari X Prize to the first successful private space program. The winning project was designed by famed aerospace engineer Burt Rutan and funded by Microsoft co-founder Paul Allen.
However, Stein said he was most taken by a group from Romanian graduate students — called Romania Space — that invented a composite rocket engine. “I asked these guys, what about your intellectual property? Who are your investors? They said, ‘We don’t have enough money for lunch tomorrow, we did carwashes to raise money for this.’”
Finding innovative ways to help such entrepreneurs crucial at a time when seed money is as hard to find as it has been in decades, said Mary Walshok, dean of the University of California, San Diego Extension.
“I think it is brilliant,” she said.