Q&A With X PRIZE Foundation's Peter Diamandis

(Philanthropic prizes are back in the news with the announcement that PATH, a Seattle-based nonprofit that leverages innovative technologies and public- and private-sector resources to improve the health of individuals around the world, will receive the 2009 Conrad N. Hilton Humanitarian Prize. In this Q&A, PND's Matt Sinclair talks with Peter Diamandis, chairman and CEO of the X PRIZE Foundation, about his organization's approach to prize philanthropy.)

Philanthropy News Digest: When Charles Lindbergh won the Orteig Prize in 1927 by flying his airplane, the Spirit of St. Louis, non-stop across the Atlantic, he did it without benefit of new technologies. Instead, he combined technologies that already existed with an innovative approach to his goal. Is today's prize philanthropy analogous to Lindbergh's solution to the challenge of transatlantic flight? Is there anything new here other than the approach?

Peter Diamandis: One of the most critical things a prize can do is change the public perception of what is possible via a physical demonstration. The world is filled with great technology that has never been applied to a concrete goal. Prize philanthropy -- and incentive prizes in particular -- are a mechanism for driving breakthroughs both in technology and in public perception. What we're doing at the X PRIZE Foundation is providing structure and a methodology that helps foundations and philanthropists to achieve their goals.

With respect to approach, there are three key attributes of a really effective incentive prize. First, the prize should be highly leveraged. If the prize is properly designed -- and not all prizes are -- you can drive ten to fifty times the amount of the prize purse to the achievement of your objective. Second, the prize should be efficient. That is, you only pay the winner; you don't pay someone with a good idea or someone who tries really hard but fails to deliver the goods, and you only pay on delivery. Third, and perhaps most important, the prize should give birth to a multitude of ideas, a multitude of solutions, rather than a single solution. That way, a new industry is born and can continue to compete and drive innovation after the prize goal has been achieved.

PND: Some might argue that the second and third attributes are contradictory.

PD: I see them as directly aligned. There are a lot of bad prizes out there, a lot of poorly designed prizes, and a lot of prizes that are just about selling. Creating an incentive prize that works is not easy. It's not a matter of putting up a bunch of money and coming up with a set of rules. When we design an X PRIZE, we're very concerned that there's a back-end business model related to the goal, so that when a prize is claimed it's not just another piece of technology to hang in a museum. Winning an X PRIZE is only the beginning. It's also about launching new industries that attract capital, that get the public excited, that create new markets. To quote a member of one of teams competing for the Ansari X PRIZE: "The first best thing could be that we win the Ansari X PRIZE. The second best thing is that someone else wins it."

You mentioned Lindbergh. After Lindbergh's non-stop solo flight across the Atlantic, the number of people who bought airplane tickets in the United States went from about 6,000 to 180,000 in eighteen months. That's a thirty-fold increase. And after the Ansari X PRIZE was won by Burt Rutan and Paul Allen, we saw more than $1 billion invested in the sub-orbital market. Though there has yet to be a commercial flight into space, hundreds of private customers have bought tickets for sub-orbital flights.

PND: Experimentation and failure go hand in hand. How important is failure to X PRIZE competitions -- and to philanthropy in general?

PD: The most important question for any philanthropist is, "What is your goal?" If your goal is to support an existing infrastructure, an existing methodology, then innovation prizes are not for you. If your goal is to help drive a breakthrough and fundamental change, then you need to be cognizant of the fact that the day before something is truly recognized as a breakthrough, it's a crazy idea. And if it was never viewed as a crazy idea, then you're probably not looking at something that will create fundamental change. A new supercomputer that's twice as fast as the fastest computer out there is not a breakthrough. Using silicon wafers to replace vacuum tubes, that's a breakthrough.

But think about it. Where in our society, in large companies, in government, in philanthropy do we build in real incentives for change? Where do we allow crazy ideas to bubble up and encourage real breakthrough thinking? It's rare. Government agencies are concerned about not failing in ways that might lead to a congressional investigation. Large corporations are worried about failures that can cause a decline in the price of their stock. Philanthropy is worried about protecting the corpus. Incentive prizes harness our innate competitive spirit and encourage teams of innovators to take risks, to try things that are going to fail, until one team succeeds.

PND: You mentioned that there are a lot of bad prizes out there. Is it important to the growth of prize philanthropy to have bad prizes out there so that the flaws in them can be identified and avoided in the future?

PD: That's a good question. I think it's fair to say that there already is a lot of information and knowledge out there about what makes a prize work. At the X PRIZE Foundation we have, as a staff, more than two hundred years of experience in prize philanthropy. I've studied every prize out there. That said, there have been new experiments, and I'm sure people will continue to come up with new ideas, which is great. Experimentation is welcome.

PND: Since the Ansari X PRIZE was claimed by Rutan and Allen's team in 2004, you've launched several new competitions with partners such as Google and Progressive Insurance. How does your organization decide which competitions and partnerships to enter into?

PD: It involves a couple of different things. First, we rely on our board of trustees and major benefactors, whom we call our Vision Circle members and who essentially are our principal shareholders. We plan to limit that group to twenty and have eleven so far. Vision Circle members agree to donate at least $2.5 million to support the foundation's operations. They are also invited to debate and deliberate at least twice a year about where they see opportunities for an X PRIZE, potential players in the market, the roles they might play, and so on. After Vision Circle members identify an area of specific interest, we take that to the board and start looking for a benefactor interested in helping us develop a prize model.

It typically takes us about eight months to a year to develop a prize. It starts with a group of ideas -- not just a single prize goal -- maybe a half dozen to a dozen ideas that we then narrow down. We determine which are likely to attract the most teams, which are likely to create the most public excitement, which are likely to create the most benefit. Then we sit down to develop a set of rules for the competition that can survive for six to eight years, a good guestimate for the length of most competitions, and we create a marketing/PR plan. There's a lot of work involved in properly designing a $1 million prize. But if you have a prize that has been thought through and fleshed out, a good business plan has the potential to attract tens of millions of dollars in prize money and additional funding. Ideally, that purse will drive $100 million in key expenditures collectively among the competitors. And if you do your job right, that $100 million can launch an industry worth billions.

-- Matt Sinclair