Behind the Prize at the X Prize: A New Model For Venture Capital

2/9/09Follow @bvbigelow

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the technologies being developed by contestants—not by investing in a particular team or competitor—but by investing in all of the contestants.

“So basically, if we can place a bet on every horse in a race, we don’t care who wins,” Stein says. The contest rules will be structured so that Prize Capital charges each entrant a “fee,” which consists of several options. It could be the right for Prize Capital to take a small percentage of the entrant’s technology royalty sales, or it could be the right to join future venture capital investors when they enter the picture to fund technology development. In such deals, Prize Capital would invest only as a passive “tag-along” investor without a board seat. Prize Capital also can provide loans of roughly $100,000 to contestants for various needs, such as filing patents.

Well-funded teams that don’t want to participate in the arrangement can opt out by instead paying a conventional cash entry fee.

By investing in all of the competitors, Stein says Prize Capital substantially reduces the risk that venture capital firms face in seed stage investments, when they back just one firm among many in a given field. That’s because Prize Capital can participate in the returns of any technology development from any of the entrants—regardless of who wins the prize. Stein says the risk mitigation strategy is so novel that he filed a patent application last year entitled “Investment Model for Formation of Capital and Value Creation.”

Stein is especially keen on the idea of developing a biofuels competition. His concern for deforestation also has led him to sign a letter of intent with a large foundation in Brazil to create a series of small prizes to develop what he calls “small-scale, distributed energy systems.” With an environmental X Prize focused on the right kind of technology breakthrough, Stein says the next “Netscape moment” could trigger a 21st Century gold rush that will save our global forests from destruction.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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