For some time, we've been noting the increased use of prize money as a way of spurring innovation, an idea made popularized by the X-Prize foundation's prize for private space travel. For the most part it's been government and non-profit foundations awarding the prizes, as they hope to spur advances that benefit some broader good. Now, however, the concept is being applied to the business world. Last year Netflix announced that it would award $1 million to anyone who could develop an improvement to the company's recommendation algorithm. Increasingl, venture capitalists are starting to wonder whether the model could be applied to their business, as well. It's not exactly clear how it would work. Some think that prizes could simply be a useful tool in building up a sector that the VCs could then invest in. Others envision models whereby a VC firm would take a stake in whichever company won the prize. Critics of the idea argue, however, that its the role of VCs to invest in companies that can make money, and that it's the market that ultimately rewards innovation. Offering prizes for innovation isn't really a market mechanism, and it could lead to "winners" that don't perform well as businesses. While it's likely that the prize model could not be transported perfectly to the for-profit realm, it does seem worth exploring further. Prizes like the one offered by Netflix show how they can be used to target something that could be turned directly into a business improvement. For VCs, perhaps a prize on how best to use prizes is in order.
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