Business Challenges Tempt Companies to Compete

America has gone crazy for business contests.

Contests sponsored by nonprofits, government agencies and corporations are offering substantial prize money to business innovators for everything from software apps to fuel-efficient cars. Mid-sized companies that have entered say that contests are worth their time and money, even if they don’t win.

Business contests, or “challenges” as they’re also known, have boomed in recent years. U.S. contests with purses of more than $100,000 tripled, totaling more than $350 million, in the decade leading up to 2009, according to a McKinsey & Company study. Contests in aviation and space, science and engineering and environmental industries offer more big-money challenges than the arts, traditionally the bastion of cash-prize contests.

There’s a simple reason business contests have become popular: offering a small amount of money drives a lot of innovation.

Entrants in February’s New York City BigApps 2.0 competition, for example, spent $4 million designing software applications in pursuit of just $20,000 in prizes, according to Brandon Kessler, CEO of ChallengePost, an 18-month-old online platform that hosted the contest and operates the federal government’s contest portal, Challenge.gov.

The federal government is getting into the challenge business in a big way thanks to the America Competes Act. Signed in January, the law empowers federal agencies to conduct contests, activities that previously were hindered by red tape. Currently, Challenge.gov lists more than 100 challenges from 30 agencies, including the Department of Defense, Environmental Protection Agency and the National Institutes of Health.

Larry Cooper, director of NASA’s Centennial Challenges program, says the agency is requesting additional funds to sponsor more challenges because, “We only pay for success this way, and we don’t limit the pathway to success,” he says. “I have a file with over 100 potential ideas for [new] challenges.”

In 2004, the X Prize Foundation’s first $10 million prize inspired entrants to spend $100 million to create a commercial spacecraft, according to foundation spokesman Michael Timmons. Challenges have distinct advantages over the government’s traditional method of issuing requests for proposals in order to develop new technology. “This is a prize you dangle and get as many valid competitors as you can, all competing at the same time and spending their own money,” Timmons says.

What Companies Get
Government agencies and other contest funders get a terrific bang for their prize money bucks. But what do companies get out of a risky endeavor that consumes resources? Here’s a look at some of the benefits:

Exposure
Companies that enter say business challenges are valuable for marketing, helping them gauge consumers’ interest in a new product. That’s why in 2007 Zap, a Santa Rosa, California, electric-vehicle maker, entered the Progressive Automotive X Prize, which sought prototypes for a car that could go 100 miles on a gallon of gas.

Zap managers entered after deciding to adapt a vehicle they were already developing. A team of 12 of Zap’s then-40 employees spent about two years working exclusively on the car, dubbed The Alias.

Ultimately, the 17-year-old company’s entry placed fourth. But Zap marketing director Alex Campbell says the exposure made the effort worthwhile. “The X Prize seemed like a platform where we could get the word out about our vehicle,” he says. “We knew we had a pretty cool design, and we ended up winning ‘Most Wanted’ in their fan-favorite poll.”

Industry Connections
Edison2 of Lynchburg, Virginia, won the Automotive X Prize. Edison2 founder and CEO Oliver Kuttner says that competing helped him gain the ear of major automakers. “It does open doors,” he says. “What we learned is worth a huge amount of money to a major car manufacturer.”

With industry feedback from the competition, Edison2 is commercializing its winning design, the Very Light Car #98. During the competition, Edison2 had 100 workers involved in designing and building the vehicle. Now, the company’s current crew of more than 100 employees is helping bring it to market.

Zap’s Campbell notes the contest rules taught the company the technical requirements needed to produce a commercially viable, energy-efficient vehicle, and the judges offered useful feedback. The company hopes to have a consumer version of the The Alias in production this fall. “Going through all that made the vehicle a lot better,” he says.

Investors
Whether or not a company wins, competing in a major business challenge can attract investors. Both Zap and Edison2 leveraged the visibility they got competing in the Automotive X Prize to attract the private investment that’s critical to auto industry startups.

In Zap’s case, the prize helped attract a major investor who has put $36 million into the company, most recently helping fund the company’s acquisition of Jonway, a Chinese automaker. The deal closed in January, and the combined company, now known as Zap Jonway, is forecasting sales in excess of $50 million this year. Zap can use Jonway’s Chinese assembly lines to target the booming auto market there and vault to the forefront of mass-produced electric cars, spokesman Campbell says.

Recruiting
Besides attracting buyers and making industry connections, companies can use business challenges to raise their profiles with prospective employees. For Zap, that meant being more attractive to talented auto industry designers and engineers at a time when many big automakers weren’t hiring, Campbell says.

Money
As unlikely as it sounds, companies’ top reasons for entering challenges often don’t include winning the prize money, says Kessler, with ChallengePost. “Most of our surveys of challenge contestants show money is the most important factor for only 20 to 30 percent of entrants,” he says.

The odds that a company will win are long, and even taking home a prize purse may not put a business in the black. Edison2’s Kuttner told reporters after his company won the X Prize that the team spent more pursuing it than the $5 million award. Timmons, the X Prize executive, says that’s not uncommon.

The team at Zap Jonway adopted a philosophy early on that industry and consumer exposure was at least as valuable as the prize purse, Campbell says. “We went into it knowing win or lose, we were going to come out of it a winner,” he says.

Challenge Drawbacks
Entering contests is not for every business. Some contests are lengthy or open-ended, such as the Archon Genomics X Prize, which started in 2006 and will continue until a company creates a technology that can sequence a human genome for less than $1,000.

Not every company stays the course. Connecticut-based genetic-research company 454 Life Sciences embarked on a bid to win the Genomics X Prize after it was announced. But the then-167-employee company’s interest waned a year into the process after it was acquired for $140 million by pharmaceutical giant Roche. Company spokeswoman Katie Montgomery says the prize isn’t a current priority.

With lengthier contests, rules sometimes change along the way. When Edison2 entered the Automotive X Prize, it carried a $10 million purse. Prize organizers later split the funds into three separate prizes, halving the value of the top prize that Edison2 won.

Lower-ticket contests can draw hundreds of entrants, lowering the odds of winning. In these events, a business could find itself competing against top-flight international corporate teams, but also teams of business-school students or inventors working alone in their basements.

A contest may fail to attract many competitors, making it less successful for contest organizers and dimming its publicity value. A recent Department of Energy lighting contest known as the L Prize attracted a sole entrant, Royal Philips Electronics’ Philips Electronics division. Ironically, Philips may not win: the company’s next-generation 60-watt bulb must still meet the challenge criteria.

ChallengePost’s Kessler advises companies interested in entering contests to go after bigger prizes, which tend to get more publicity. They’re also usually more complex and difficult, leaving citizen-inventor types out of the running, he says. “Bigger prizes sort of self-select for business,” he says.