Prize Philanthropy: Spurring Innovation and Awareness of New Solutions

The recent Breakthrough Prize in Life Sciences established by tech giants Yuri Milner, Sergey Brin, Anne Wojciciki, and Mark Zuckerburg has been awarded to 11 scientists doing innovative research. At $3 million for each scientist, these awards are more than twice the amount of each Nobel Prize.

[Above photo: Dr. Jane Foley, Milken Educators, state, district and school officials, and students honor her success and show off her $25,000 Milken Educator Award prize. Photo courtesy of the Milken Family Foundation]

The buzz surrounding these awards has shed light on a giving method that has been growing in popularity for some time: prize philanthropy. This approach can be a useful tool for philanthropic leaders who are especially interested in bringing about radical new innovations or increasing awareness about a cause. But don’t close down your foundation or throw your giving plan out the window yet. Prizes are often more challenging to plan, advertise, and award than traditional gifts or grants. Prize philanthropy is not a replacement for traditional grantmaking, but can be a welcome addition to a family foundation or individual philanthropist’s toolbox.

What is Prize Philanthropy?

Prize philanthropy is a form of philanthropic giving through which individuals, teams of individuals, or organizations compete for a prize. Prize philanthropy is described in the book The Open Innovation Marketplace as the nonprofit sector’s answer to innovative research and development in the for-profit and public sectors. According to the authors, those who award donated prizes “incentivize breakthroughs perceived as having some sort of broad social or philanthropic intent.” Other common features of prize philanthropy programs include:

Prizes are usually monetary, but a competition can also have other benefits such as providing a platform to showcase a new project or program or putting the prize winners in contact with people who can help them; for example, a partner that can help turn a winning prototype into a product.

A prize may or may not be funded by the same individual or organization that designs and runs the contest. Foundation or individuals may make a grant or gift to a nonprofit that is set up to award prizes to ensure a prize is tax deductible. A foundation may also award a prize on its own as a non-taxable expenditure, but strict IRS guidelines regarding prizes must be followed.

The Value of the Prize Process

The primary reason that donors typically engage in prize philanthropy is that prizes increase awareness of a particular problem and drive competitors to find a solution. Two other important benefits can result from the process of awarding prizes: reduced risk for the donor and faster problem solving due to competition.

Reduced risk: Prize philanthropy makes rewards contingent on success; thereby shifting risk from the prize sponsor to competitors. Competitors must show an immediate solution to a given problem. Rather than paying for the implementation of a proposed idea as with traditional grantmaking, prizes are awarded to those with the best solution. Paying for a solution — as opposed to giving money and “hoping for the best” — makes prize philanthropy a particularly attractive giving method for businesspeople accustomed to looking for a strong return on each investment.

Fast solutions: The competitive atmosphere created by prizes can expedite problem solving since it creates “an urgency that delivers previously unachievable levels of focus and creativity, with real innovation as the ultimate result.” Open source information and social networking allow announcements about competitions to travel quickly to unexpected places and lead to innovation that would not have been possible otherwise.

How Prizes Can Be Game-changers

The ways in which prizes can bring about change can be broadly broken into the following categories:

Identifying excellence: Prizes highlight the types of behaviors, ideas, and achievements that the donor or the judging panel have established as excellent and worthy of replication and recognition. For example, the Eli and Edythe Broad Foundation awards a $2 million award each year to a large urban school district that demonstrates the greatest overall performance and improvement in student achievement and reduction in achievement gaps among low-income and minority students.

Influencing public perception: Prizes often cause the public to pay attention to a particular issue or topic and may influence their perception. For instance, the X Prize Foundation, an established purveyor of prize philanthropy, has designed prizes that have altered the supply and demand dynamics of particular markets. The Ansari X Prize, a contest to build and launch a spacecraft capable of carrying three people to 100 kilometers above the earth’s surface, twice within two weeks, created a supply of feasible private spacecraft options and the publicity surrounding the prize allowed latent demand for these vehicles to be uncovered.

Mobilizing new talent: Prizes reduce bureaucratic barriers to entering a problem-solving community. With scientific innovation, in particular, there is a historic trend of outsiders coming up with solutions when leaders in the field could not. A 2007 Harvard Business School report suggests this is empirically true as it states “the further the problem was from the solver’s expertise, the more likely they were to solve it.” An example of talent in unexpected places came in the 2010 competition for the Progressive Automotive X Prize, a competition in which teams competed to create production-ready highly fuel efficient vehicles. A team of a teacher and students from West Philadelphia High School was accepted into the competition. Although they did not win the grand prize, the West Philly Hybrid X Team made it to the semifinals beating out over 80 teams; without the competition, the talent of these students might have never been discovered.

Educating individuals: Prizes can teach the public more about a field that they were not familiar with and can expose competitors to new ideas. In establishing some prizes, the process of competition is at least as important as the outcome. Education is more often purposefully built into contests designed for K-12 or university students, but through the process of competition, competitors for all prizes end up learning new skills and information, thereby enhancing the prize’s overall contribution to a field. An example of a prize with built-in educational value is Skild’s Innovation Challenge, a competition for business school students. Teams from top business schools all over the world are teamed with sponsor corporations to solve real-world business and social innovation challenges.

Focusing communities on specific problems and strengthening problem-solving communities: A prize can focus a problem solving community on a specific well-defined challenge or set the broad direction of a discipline’s or a community’s efforts. Prizes have the ability to bring people together to share approaches, ideas, and best practices. An environmental problem solving community was created through the 2011 Wendy Schmidt Oil Cleanup X Challenge. An X Prize staffer remarked about the challenge’s teams: “Oh, sure, you all have rules you have to follow (don’t we all) and yes, you all have your obvious heated debates, but in the end, when all is said and done – you have created an extended family with the same goals. Where else can you experience this sort of team spirit?”

Mobilizing capital: Prizes can provide valuable leverage for a prize sponsor’s investment by mobilizing other financial capital in support of a solution. By shifting risk from sponsors to competitors, prizes cause competitors to invest time and capital. Also, when these prizes produce vetted solutions, the result can be further investment in the creators of these solutions. In the Oil Cleanup X Challenge, Fred Giovannitti, a tattoo artist, designed one of the most innovative solutions in the competition. Giovannitti’s talent for design was recognized by one of his tattoo clients, the CEO of an Oregon environmental cleanup company called Vor-Tek Recovery Solution, and he became a crucial part of the Vor-Tek X Challenge team. While the Vor-Tek team did not win the X Challenge, their status as finalists in the competition allowed the young company to approach investors with confidence. Giovannitti is now creative director at Vor-Tek — in addition to his tattoo business.

Avoiding Common Mistakes

Along with the benefits, there are also risks to consider before engaging in prize philanthropy. The broad issues that donors need to be concerned about are 1) how the process of awarding a prize might impede them from achieving the results they want from their philanthropy or 2) that awarding a prize could create unintended negative results. Problems can arise if a donor makes any of the following mistakes when creating a prize:

Not learning about the field of prize philanthropy: Don’t start from scratch when creating a prize. As with any philanthropic venture, prize philanthropy works best when a donor knows what has worked (and not worked) in the past and what other prizes exist now. To ease administrative burdens and ensure tax deductibility, foundations and individuals can work with nonprofit organizations that exist for the sole purpose of giving away prizes. If individual donors and foundations choose to award a prize directly, they should consult with their attorneys and tax professionals about how to award prizes as non-taxable expenditures. Additionally, potential donors should learn about what other prizes exist in their area of interest. The growing popularity of prize philanthropy has resulted in some overlapping or competing prizes, potentially diminishing the impact of each prize.

Underestimating marketing and administrative commitment: Envisioning, implementing, and supporting a prize takes a great deal of ongoing administrative work. A well-planned prize without the proper marketing may not reach the innovators who could be competitors. A poorly managed or poorly implemented prize process can reflect negatively on the organization sponsoring the prize. In addition, a prize philanthropy effort can distract from existing grantmaking or charitable giving activities.

Not having deep enough knowledge of the problems in your area of interest: As with other giving vehicles, you must know what the problems are in your field before you try to empower others to solve them. Otherwise, after all the marketing and administrative work is complete, a competition may not garner the interest of problem solvers because its focus is too narrow or not an issue of pressing concern in the field. Just as grantmaking guidelines can be too stringent and detract potential grantees, a competition that is not of interest to potential competitors may not create results. The opposite problem can also occur. High-value prizes can distract problem solvers from more important activities or urgent challenges, particularly in the fields of science and engineering. Distracting a field from more important issues can hurt the prize sponsor’s reputation.

Mismanaging the communications surrounding a prize: Most donors believe philanthropic giving is about addressing problems or supporting worthy causes, not self-aggrandizement. This is especially important to keep in mind with prize philanthropy which by nature is a very public endeavor. Donors who are considering prize philanthropy must understand how creating and awarding a prize might be interpreted. Corporations have been criticized for using prize philanthropy as a tool to attract inexpensive, positive publicity and to brand themselves as philanthropic organizations. An individual or foundation could be similarly criticized for using prize philanthropy as an effort to draw attention to oneself or one’s organization rather than focusing on social change.

Case Study: The Milken Educator Awards

Milken-Educator-Awards Teacher magazine called the “Oscars of Teaching,” have been given out by the foundation since 1985. The initiative gives $25,000 unrestricted awards to outstanding education professionals across the United States. Educators are chosen by committees appointed by each participating states’ department of education according to the following criteria:

exceptional educational talent
exemplary educational accomplishments
unheralded contributions which are worthy of being in the spotlight
early-to-mid career educators
engaging and inspiring presence that motivates others

These educators are recognized at school assemblies in their communities and also join the Milken Educator Network, a group of over 2,500 educators who previously received the award. This network can be a valuable resource to educators as they move through their careers. Administering such an initiative every year is no small task. Three staff people work full-time and one works part-time on all of the elements of the Milken Educator Awards.

Case Study: The Wendy Schmidt Oil X Challenge

The Schmidt Family Foundation was established in 2006 by Wendy and Eric Schmidt to help transform the world’s environmental and energy practices with the ultimate goal of creating an intelligent relationship between human activity and the use of the world’s natural resources. The grantmaking programs of the foundation focus on raising awareness about climate change and alternative energy, collaborating with environmental funders across the United States to fund various environmental projects, as well as a place-based program in Nantucket. The environmental focus of the foundation has been carried over to a prize philanthropy project of one of the foundation’s founders, Wendy Schmidt.

Ms. Schmidt worked with the X Prize Foundation to develop the Wendy Schmidt Oil X Challenge, a $1.4 million competition intended to inspire innovative solutions to speed the pace of cleaning up seawater surface oil resulting from spillage from ocean platforms, tankers, and other sources. Ms. Schmidt turned to the X Prize Foundation because she felt that creating a prize would “spur innovation in a unique way, bringing together scientists, technologists and inventors with leaders in industry and government to help introduce problem solving technologies to the marketplace with mechanisms for rapid deployment.” The challenge was designed to last for one year. Teams were asked to more than double the industry’s previous best oil recovery rate. At the conclusion of the challenge, the two teams had achieved this goal, and five additional teams also beat the industry’s best oil recovery rate. The competition was considered particularly successful because rather than merely designing systems that would allow them to win the competition, the judges for the competition reported the teams had designed solutions that truly achieved the goal of developing replicable technology that would work in the real world. Without the combination of Wendy Schmidt’s vision and philanthropic dollars and the X Prize Foundation acting as an intermediary, these advances in oil clean-up technology would not have been possible.

Conclusion

and-the-winner-is Prize philanthropy can be a successful philanthropic tool for philanthropists who are particularly passionate about finding and connecting with innovative problem-solvers, especially for problems with scientific or engineering-based solutions. When a prize works, the result is a proven solution. Consequently, prizes offer the potential for a great return on investment. Prizes are very public giving vehicles which require a lot of work to implement, but they can spur innovative solutions to seemingly unsolvable problems. Donors who devote the time and energy required to plan and carry out a prize will see results and be engaged in powerful philanthropy.