News – Blog
7 December 2021
The most recent data from the Office for National Statistics (ONS) shows that, in 2019, total public and private expenditure on R&D in the UK was £38.5 billion. Whilst this represents the highest level of spending on research and innovation on record, the social and economic fallout from the Covid-19 pandemic has made clear the need for rapid innovation. Indeed, adjustments to the R&D spending target also suggest that pressures on research and innovation policy could well remain and, perhaps, that typical processes might not be enough. In which case, how else can we directly – and quickly – fund innovation, and leverage external resources to focus on the challenges at hand?
Challenge prizes provide a different way of addressing this problem – a way to directly fund innovation through an approach that maintains the market mechanisms of incentives and competition, and simultaneously opens-up and diversifies the pool of innovators. Prizes are efficient too in only triggering purse payments when successful and impactful solutions have been achieved. Using challenge prizes to stimulate breakthrough innovations in underserved markets, for public good, and in areas where ordinary incentives aren’t effective can, therefore, have a transformative effect in a problem-space and help capture people’s imagination about what is possible.
The power of challenge prizes is partly illustrated by the effect of mobilising capital – specifically, leverage in the form of additional investment in a prize field. Prizes can attract a mix of new funding to an innovation problem via the investment that participating teams secure during and after the competition.
We looked at how much investment individual teams raised in the Open Up Challenge – 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.
Upside Energy – now known as KrakenFlex – was one of the entrants to Challenge Works’ Dynamic Demand Challenge 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. Findings from an evaluation of the Big Green Challenge highlighted the enhanced credibility from being part of the prize as enabling finalists to attract partners and leverage funding.
Although we are generating findings in support of prizes creating financial leverage, we recognise the limitations of our current evidence. Any serious intention to innovate innovation, as identified recently by Professor James Wilsdon, requires improved evidence and data to inform policy. Challenge Works are 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.
Given uncertainty about how best to tackle many of the social problems we currently face, challenge prizes offer a way of engaging new and diverse innovators and providing these innovators with greater access to funding. Participating in challenge prizes, therefore, can provide an alternate way to bolster the expectation of rewards to innovators and to increase investment in a particular field.
