Behind the Prize at the X Prize: A New Model For Venture Capital
At a time when many people are saying the traditional venture capital model is broken, an influential Internet pioneer has developed a fundamentally different concept for investing in innovation.
San Diego resident Lee Stein explained his concept to me in a long conversation last week. He already has given shape to his idea in the form of Prize Capital, an investment firm he founded in 2006 in Del Mar, CA. Last week, the X Prize Foundation identified Prize Capital as the firm that put up the $25,000 award for the “What’s Your Crazy Green Idea?” contest won by a pair of U.C. Irvine students. But Stein says that wasn’t a true test of the Prize Capital model.
“We sponsored the YouTube prize because it gave us the opportunity to formalize our relationship with the X Prize Foundation and YouTube—and to watch and experiment with online marketing of prize ideas,” Stein says. Establishing an incentive for “crazy green ideas” also reflects Stein’s personal passion for using innovation to help the environment. He is particularly alarmed about global deforestation, and says, “We are living in the era of greatest extinction since the time of Noah.” His environmental ideas are evident at Prize Capital, but before detailing those, a bit of backround.
Throughout his career, Stein has shown a knack for seeing the essential nature of a business, and acting on his insights. Trained as an accountant and lawyer, Stein and his wife formed a financial management firm in 1980 for the Hollywood elite. As he once put it, he realized that many rock bands and film stars had the same gross annual income as a medium-size company—without a CFO or corporate finance department. Their clients included film stars Gene Hackman and Matthew Broderick, and rock bands Journey, Rod Stewart, and Men at Work.
In the early 1990s, when many people viewed the Internet as a playground for computer renegades and cowboy poets, Stein helped to develop one of the first Internet payment systems. He says he remembers thinking, “If we don’t bring commerce to the Internet, it will just go the way of CB radio.” He founded San Diego-based First Virtual in 1994 to provide secure online credit card transactions for consumers. Stein says his validation came almost a year later with the Netscape IPO, which fundamentally transformed the way people viewed—and valued—what was happening on the Internet.
First Virtual’s early investors included GE Capital, EDS and First USA, which was then a fast-growing issue of Visa credit cards. The company went public in a successful IPO in 1996 and was sold in 1998 to MessageMedia, which was itself eventually acquired by DoubleClick. First Virtual’s patents are now held by eBay.
Stein says he began to develop his ideas for Prize Capital about three and a half years ago, after PayPal founder Elon Musk invited him to … Next Page »