In this week’s What Matters podcast, we hear from Peter Diamandis, chairman and CEO of the X Prize Foundation—a nonprofit group focused on driving innovation through large, incentive competitions. In 2004, the foundation awarded the Ansari X PRIZE, a $10 million award for the first private group to build and launch a reusable, manned spacecraft. Diamandis recently spoke with Paul Jansen, a principal in McKinsey’s San Francisco office, about how prizes can spur innovation, create new markets, and address some of the world’s thorniest socioeconomic problems.



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Paul Jansen: Hi Peter, thanks for joining us today. We’ve seen a real renaissance in prizes over the last five years, both in terms of the number of prizes as well as the diversity of subjects that they are focused on. And the X PRIZE Foundation is clearly one of the leaders in driving this growth by using prizes to incentivize and drive innovation. How do prizes like X PRIZE manage to drive innovation?

Peter Diamandis: Well, the first thing they do is they don’t pre guess what the solution is. They have clarity of the goal. What’s the audacious but achievable objective that you dangle out to the world, out of the 6 billion minds out there, and say, “Who can solve this?” And by crowd sourcing that solution, if you would, you get a diverse set of approaches—hopefully from non traditional players.

I’ll say one other point, which is that the day before something is truly a breakthrough, it’s a crazy idea. And if you’re trying to incentivize breakthroughs, where in our society do we allow for crazy ideas to bubble up? Large corporations can’t do them, because they’re concerned about doing something publicly and having their stock price plummet. Government agencies are worried about a congressional investigation. The properly structured prize literally creates the opportunity for almost, what I call, off-balance-sheet risk taking: where a company or government agency or individual can put up an audacious goal and, if it’s won, amazing. They’re a hero. And if it’s not won, it’s no skin off their nose, so to speak. But I believe in the United States, in particular, we’re killing ourselves by how risk adverse we’re getting. And prizes are about a way of incentivizing and motivating intelligent risk taking, which is really what’s required to allow for breakthroughs. And everybody knows we need breakthroughs now more than ever.

Paul Jansen: Considering that there is only one winner, how do you go about motivating participants to invest their time and resources, which cumulatively may represent ten times or more the value of the prize? That seems counter to economic sense.

Peter Diamandis: One of the things that we end up focusing on when we build an X PRIZE in particular is two elements. One, to make sure that there is a huge amount of effort put in to the publicity, to the marketing, to the television—such that it really is a competition, that the teams are turned into heroes, that the global spotlight is focused on them. The second thing is that we spend a lot of time making sure that, when the competition is won, there is what we call a back-end business plan. In other words, the competition is structured such that when it’s won, capital is flowing in. In particular, for example on the Ansari X PRIZE, one of the rules required that the teams have a spaceship carrying three adults—not just one adult—so that, at the end of the competition, there would be a pilot and two paying passengers. So if you believe that your team is not only going to win the money but have a viable industry to compete in afterwards, you’re willing to spend much more than the prize purse.

Paul Jansen: I want to shift gears and talk about how you do things at the X PRIZE Foundation. When a sponsor or benefactor comes to you with a concept or idea for a prize, what happens next?

Peter Diamandis: When a benefactor comes to us and says, “We’d love to do an X PRIZE. Would you study this?” We enter a period of what we call prize discovery. And it costs us on the order of a million bucks to actually do the process of designing the prize; understanding, first of all, what the root cause problems of the issues are. Why is there an area that is stuck? What is the market failure?

Then, we end up coming up with probably half a dozen to a dozen prize ideas to address that issue. Once that issue is thought through, we’ll then look at the prize ideas and say, “Which of these are most understandable by the public? Which of these would drive a telegenic media finish? Which of these would attract teams?” And we end up with a final set of rules. Then, how large should the prize purse be? How large is a prize purse big enough to attract global attention and bring a new slate of players to the table? Once that phase of the work is done, which is probably about a third of the work we do, we then end up focusing on writing a business plan—which is, what’s the marketing plan for the competition? What is the public relations plan? What is the educational plan? How will the prize be announced? What is the television side of the equation? Because, at the end of the day, the competition—which brings forward a new set of technologies or a new service, new capability—is only part of the equation. Equally important is changing the way the world views that problem.

When the Ansari X PRIZE was won, the fact that SpaceShipOne existed was great; the fact that Richard Branson came in and decided to commit to taking it to SpaceShipTwo was great. But what was really the most important thing was the paradigm change that the public now saw that you didn’t have to be a government to fly into space; that kids grow up and say, “I want to be a private astronaut”; that we now would live in a world where private space flight is possible. That was the most important part that, for us, came out of us changing the perspective of what people think can be done.

The final thing that we are focused on is making sure there are no regulatory hurdles in the way of the teams. When the Ansari X PRIZE was competed for, in the year or two before the flight, we realized that the rules and regulations to allow for private space flight did not exist in the United States and that teams literally were having to speak about going to other parts—to Canada, Mexico, South America, wherever it might be—to try to do their space flights. And so, we ended up working as a foundation with the FAA, with administrator Marion Blakey, to make sure the rules and regulations for reusable, private, human space flight existed domestically such that teams could compete.

Paul Jansen: You spend a lot of time designing and developing a prize. Can you talk about what you do once it’s been launched?

Peter Diamandis: We actually spend a lot of money actively managing a prize. It’s not like you put up a set of rules and a prize purse and walk away. We are spending time soliciting teams to compete; we are focusing on telling those teams’ stories to the media. The more that we can make the teams into heroes, the more they get media attention, the more money they can raise to take a greater risk in the design that they’re taking and the more that there is leverage on the prize purse.

Paul Jansen: Can you tell us what doesn’t work for prizes?

Peter Diamandis: When I started looking at prizes back about 15 years ago now, I studied the prizes that worked and the prizes that did not work. And the prizes that worked really were ones that had very clear, measurable goals; it was about the human story and how the technology affected humanity; it was about a hero going on a hero’s journey that attracted people’s attention. Some of the prizes that failed were more about widgets that had a hard time connecting to individuals. Others set goals that were way too high, and that’s a very difficult part of the equation—how do you set it so that you have something that’s audacious but yet achievable?

When I first announced the Ansari X PRIZE, everybody said to me, “Peter, if it’s not going to orbit, it doesn’t matter.” And I knew the energy equation here: it was 50 times harder for a spaceship to go to Mach 25 than to Mach 3 or 4. It’s a square of velocity. So, we set as a suborbital goal, originally, 100 miles and then looked at the re-entry thermal characteristics and said, “You know, even 100-miles altitude is too high.” We brought it down to 100 kilometers: 62 miles. Had we set it higher, we wouldn’t be having this conversation today. The Ansari X PRIZE would not have been won. So how do you set something that is sufficiently difficult but not too hard? Prizes have failed because of that. Modality as well. And it’s really having to be clear about why are you doing this: is there a market failure? Another place that prizes have failed is in an area where there isn’t a market failure; where the industry is doing just fine and putting up a prize really is insignificant to the industry you’re trying to modify. The question is really, does your prize change behavior of individuals?

Paul Jansen: What’s next for you and for the X PRIZE Foundation?

Peter Diamandis: Well, I’ll tell you an area that I’m excited about but don’t have an answer for, which is water. Clean drinking water is something that, in the developing world in particular, is an existing major problem. And [the challenge is] trying to design a competition where it’s not just about a widget, because there’s lots of technology literally abandoned on the roads in Africa that, once it broke, never got fixed again.

Another area that I’m excited about, but it is extraordinarily difficult, is educational systems. You know, the US educational system is 100 years old. It hasn’t changed with the times. People recognize there are clearly failures, so we’re constantly looking about what are X PRIZEs that we can create there. We’ve just taken on a problem area that we’re excited about, with a partner, WellPoint Insurance, which is an X PRIZE to reinvent the US health care system. That’s something for which we have some very exciting ideas, and we’re in the middle of prize design for that right now.

Paul Jansen: Peter, that’s an enormous undertaking given that health care seems to be such a complex and intractable problem. How do you think about breaking health care into something that can be amenable to a prize?

Peter Diamandis: That’s exactly what we spend a huge amount of time doing. We have now 45 people in the X PRIZE Foundation focused on thinking about, is this an X PRIZE? What have we learned here? And what failed over there? So we have gone through 20 or 30 iterations of prize ideas there. The one that we’re, for example, kicking around today is that it turns out there’s a trillion dollars in economic loss in the United States for hospitalizations and missed days at work. And the concept right now is having teams compete to demonstrate how they would take a population of 10,000 people that were assigned to them and reduce the number of hospitalizations and missed days at work by 50 percent or more. Now, it turns out that WellPoint has the ability to put forward populations of 10,000 people where they have the historical record of how many sick days and how many hospitalizations that population has had over the years.

And so, all of a sudden, you have a very clear, measurable objective goal. Now if you have a number of teams competing, you can look and say, ”Okay, which of them have actually reduced it by 50 percent or more? Which have had dramatic [results]—you know, maybe there’s a team that does it by 70 percent or more—and how did they do it?” Now, the beautiful thing is that WellPoint has agreed on the winning solution being implemented across their system. So all of a sudden, we’re hitting the metric of not only having the competition won but putting it into practice. We talk about the fact that an X PRIZE, when the prize is won, is just the beginning. It really is turning that winning event into the birth of a new industry or a new approach, rather than just having it be a historical exhibit in a museum.

Paul Jansen: Peter, you’ve been looking at prizes for a long time now. How do you see their use evolving going forward?

Peter Diamandis: I believe that prizes are an important philanthropic tool. And as I go out there and speak to foundations and to the public, I’m setting out the theme that, in the future, I’d like to see five to ten percent of all philanthropy be in the form of incentive prizes; that it’s an efficient and highly leveraged tool for foundations and philanthropists to meet their needs and objectives.

I think we’ll start to see governments continue to use and grow the use of prizes. The challenge that government has with prizes is typically that a congressman or senator wants to be able to selectively award contracts to their district, and a prize does just the opposite. It says, “Here’s the goal. And whoever wins this from any part of the planet, or any part of the US, gets the prize money.” So you have to let go of some level of control. And the government can do that in some areas, but in other areas, it would be challenging. I think as we start to see over a thousand billionaires on this planet, I think that we will see philanthropists start to put forward larger and larger prizes. I wouldn’t be surprised if there were $100 million–plus prizes out there.

And I’d love to see a day when the world’s biggest challenges—whether it’s poverty, hunger, pollution, environmental, energy issues—have these megaprizes out there that sway where graduate students do their research, where companies do their R&D, where people aspire to go to attack these challenges to not only win the money and the glory but the thanks of humanity.

Paul Jansen: Peter, thank you very much for joining us.

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