The growing interest in the use of challenge prizes as an inducement to innovation provides a mechanism for more transformative change in the way innovation is funded.
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Testing our hunches
Two of our core hypotheses are that challenge prizes incentivise participating teams to invest their own funding and resources and that prizes leverage greater additional funding. On the former, there is growing evidence of this effect in challenge prizes. For example, the development of a suborbital spacecraft for the Ansari X PrizeDARPA Challenges were estimated to have induced investments from entrants up to 50 times the size of prize purse. Evidence from four of our own challenge prizes ( Dynamic Demand Challenge Prize, Data Driven Farming Prize, Open Up Challenge and the Longitude Prize
Attracting further investment to a prize field
On the idea that challenge prizes leverage greater additional funding – as participants are able to attract more external funding than otherwise would have happened due to the raised profile, wider platform and visibility to key stakeholders that a prize provides, we are beginning to gather insights to support this claim. Figures taken from Crunchbase – an open-source database of entrepreneurial activity – was used to look at how much investment individual teams raised in the Open Up Challenge before they participated and after they’d been registered onto the prize. The Open Up Challenge was a £5m prize fund backed by the CMA to inspire solutions that use new open banking technology to transform the way small businesses discover, access and use financial services. Fourteen participants that took part in stage 1 of the challenge had received a combined total of £102.7m investment prior to the prize commencing, whilst they collectively went on to secure £638.1m subsequent to taking part in Open Up. Data on stage 2 of the Open Up Challenge shows the investment received for ten participants in the pre-prize phase totalled £320.7m, and the total post-prize amounted to £288.6m. Finally, data taken from the Open Up 2020 Challenge, which finished recently in October 2020, also saw an increase in the external funding received by fourteen participating teams.
The chart below shows the aggregate investment in teams on the Open Up and Open Up 2020 Challenges, and highlights the positive link with challenge prize participation. Teams that received investment across the three challenges include Funding Circle, Funding Options, Fluidly, Mojo Mortgages and Moneybox.
To illustrate how this leveraging works in practice, Upside Energy – now KrakenFlex – was one of the entrants to the Challenge Works Dynamic Demand Challenge with the idea of harnessing the energy in back-up power supplies, such as batteries in data centres, traffic lights and electric car charging points, to create a virtual energy store that could be drawn on when needed. It received £10,000 to develop a business plan and prototype and started formally trading 18 months later, in April 2015. By the end of 2018, Upside had raised more than £3 million in grant funding and £6.7 million in equity finance.
Mojo Mortgages, who combine credit scoring and open banking data to help determine a client’s mortgage readiness and offer personalised mortgage recommendations, were one of the winners of the Open Up 2020 Challenge. Mojo Mortgages felt that the prestige of being a finalist, and then winner, led to a wave of positive and high-profile press coverage that helped their brand grow exponentially. They were able to make numerous industry connections that they thought would have been difficult to establish as a start-up, had they not taken part. Subsequently, RVU, the owners of Uswitch, Money.co.uk and Confused.com, agreed to buy Mojo Mortgages (subject to regulatory approval) with the aim of scaling the business to handle the mortgage enquiries from some of the 15 million users that visit its sites each month.
Increasing our confidence on the leverage effect
Qualitative insights from the Dynamic Demand Challenge Prize, Data Driven Farming Prize, Open Up Challenge and the Longitude Prize further indicate that a significant number of innovators were able to secure additional external funding while participating in the prize and subsequent investment thereafter, which was largely attributed to the value added to the business from going through the prize process and the legitimacy conferred to the problem area by the challenge. These findings suggest that innovators were highly committed to
working on their solutions post-prize, and were successful in continuing to raise funding to further develop their ideas and to progress their businesses. Participants felt that ‘winner’ status added greater credibility when seeking further funding, whilst greater use of stage-gates to signal more interim winners was cited as an approach to help more teams to directly benefit from external funding.
Although these findings are largely supportive of our hypotheses, we recognise limitations of the evidence. Comparing investment before and after the Open Up challenges on boarding is complicated by other factors that were also changing at the same time the prize was taking place. Answering this question more definitively requires the construction of a counterfactual analysis, in order to estimate how innovation in open banking technology for small businesses and related investment would have evolved in the absence of the Open Up Challenge. Challenge Works are currently pursuing opportunities to run experiments that test some of our core thinking about prizes – and would welcome connecting with other organisations interested in this area.
Though the evidence is still developing, there is data to suggest that challenge prizes do leverage resources in the pursuit and development of solutions. Challenge prizes can be a mechanism to help teams scale and maximise their impact, and the investment that competing teams receive post-prize can be seen as a demonstration of the real-world success and diffusion of prize solutions.
