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But when designing a prize, there is a second kind of momentum you can tap into—our innate desire to compete. Take coders. Consider what we learned from meeting Jack Hughes and exploring TopCoder. First, coders are a competitive bunch. They like besting one another and they like leaderboards for bragging rights. But what else do coders enjoy doing? They watch movies—a lot of movies. They're the same bunch that lines up three days early for the latest Star Wars release and stays up three days straight arguing Freddy versus Jason. Thus, if you could create an incentive prize that harnessed this competitive love of coding and this argumentative love of movies and tied them together—meaning design a prize around the intrinsic motivations at the core of coder culture—what might be possible?

Well, in the case of Netflix, a better movie recommendation engine.

A movie recommendation engine is a bit of software that tells you what movie you might want to watch next based on movies you've already watched and rated (on a scale of one to five stars). Netflix's original recommendation engine, Cinematch, was created back in 2000 and quickly proved to be a wild success. Within a few years, nearly two-thirds of their rental business was being driven by their recommendation engine. Thus the obvious corollary: the better their recommendation engine, the better their business. And that was the problem.

By the middle 2000s, Netflix engineers had plucked all the low-hanging fruit and the rate of Cinematch optimization had slowed to a crawl. Every time one of their recommendations was a clear miss—based on your interest in
Breakfast at Tiffany's
we think you'll enjoy
Naked Lunch
—customers got angry. And with new competitors sprouting up in the likes of Hulu, Amazon, and YouTube, this ire was getting expensive. So Netflix decided to attack the problem head-on, announcing the Netflix Prize in October 2006—a million-dollar purse for whoever could write an algorithm that improved their existing
system by 10 percent.
¹⁵

And this contest is a perfect example of what happens when you design prizes around intrinsic motivations. Competition, coding, and movies—what could be more fun than that? Within two weeks, Netflix had received nearly 170 submissions, three of them outperforming Cinematch. Within ten months, there were over 20,000 teams from 150 different countries involved. By the time the contest was won, in 2009, that figure had doubled to 40,000 teams.

But the results that Netflix saw extended far beyond the number of contestants entered in a contest. As Jordan Ellenberg explained in
Wired
: “Secrecy hasn't been a big part of the Netflix competition. The prize hunters, even the leaders, are startlingly open about the methods they're using, acting more like academics huddled over a knotty problem than entrepreneurs jostling for a $1 million payday. In December 2006, a competitor called ‘simonfunk' posted a complete description of his algorithm—which at the time was tied for third place—giving everyone else the opportunity to piggyback on his progress. ‘We had no idea the extent to which people would collaborate with each other,' says Jim Bennett, vice president for recommendation systems at Netflix.”
¹⁶

And this isn't an aberration. Over the course of the eight XPRIZEs launched to date, there has been an extraordinary amount of cooperation. We've seen teams providing unsolicited advice, teams merging, teams acquiring and sharing technology and experts. When the prize is driven by an MTP, while a team's primary purpose is to win, a close second is their desire to see the primary objective achieved; thus teams exhibit a much higher willingness to share.

A well-designed incentive competition provides teams with a “whole is bigger than the sum of the parts” mindset. This happens because the right motivations lead to increased cooperation, which leads to unpredictable network effects. In November 2007, for example, progress toward Netflix's desired 10 percent improvement had slowed considerably. The geeks had taken things about as far as possible when a British psychologist named Gavin Potter entered the fray. Instead of the purely mathematical approach utilized by most of the
other teams, Potter was making startling progress by considering the human factor (he had actually outsourced the difficult math to his daughter, then a high school student). Potter didn't end up winning the competition, but the winning team did begin taking the human factor into account and this helped them to victory.
¹⁷

In the coming years, competitions such as the Netflix Prize will become more and more important. Today's world is awash in data, and mining this treasure trove for useful tidbits can be worth billions of dollars. Tomorrow's world will be even more information packed. As we are entering an era of a trillion sensors and ubiquitous networks, we are going to be able to gather data about anything, anywhere, any time we want. Incentive prizes provide exponential entrepreneurs with an incredibly efficient method to extract tremendous knowledge out of this bounty, providing an innovation acceleration engine unrivaled in history.

I spend a lot of time giving presentations to corporations. When I speak to executives, there are six key points I stress.

1. The only constant is change.

2. The rate of change is increasing.

3. If you don't disrupt yourself, someone else will.

4. Competition and disruption are no longer coming from some multinational company overseas. They now originate from the guy or gal in a start-up garage harnessing exponential technologies.

5. Given Bill Joy's famous comment “No matter who you are, most of the smartest people work for someone else,” how do you tap into these individuals?

6. If you're dependent upon innovation only from within your company, you are dead. You must harness the crowd to remain
competitive.

While the XPRIZE Foundation has been incredibly successful, a few years back I heeded my own advice and asked myself how I would disrupt my own company. Or more specifically, how might someone disrupt XPRIZE? The answer, which should now be evident, is the creation of an online platform that allows anyone to launch a challenge in any area he or she cares about, where the crowd can help design the prize, fund the prize, and ultimately compete to win the purse. A platform able to disrupt archaic closed innovation systems, where hundreds or thousands of smaller challenges can be launched per year, thus scaling way beyond the three multimillion-dollar XPRIZEs launched each year. Sort of a Craigslist meets Indiegogo scenario.

The platform, now named HeroX,
¹⁸
was incubated at XPRIZE headquarters, but, as with any skunk works, separation from the mother ship was critical. So HeroX hired a small, passionate virtual team, with members located everywhere from Canada to Ukraine.
¹⁹
The CEO, Christian Cotichini, turned out to be the venture's first major outside equity investor.

As with any new start-up, launching early is critical, so we turned to our existing supporter base for help. Graham Weston, cofounder of Rackspace, stepped up to be our first customer. Weston wanted to help Mexican entrepreneurs open up stores on the US side of the border, specifically in his hometown of San Antonio. To do this, he launched a 24-month, $500,000 competition on the HeroX platform dubbed the San Antonio Mx Challenge.

“The top two obstacles faced by Mexican entrepreneurs are access to visas and access to information,” says Weston. “Getting a visa to work in the United States is very difficult. The laws are not designed for tech entrepreneurs. Second, many Mexican entrepreneurs struggle with the tactical requirements of launching a business in the US—around things like financing, recruiting, real estate, and employment law—and do not know where to go to for information and help.”
²⁰

To counter these obstacles, the San Antonio Mx Challenge will pay $500,000 to the individual, team, or organization that creates and implements a repeatable model to assist Mexican tech companies in
opening active offices in San Antonio. The winner will score the highest on a points-based system that measures three things: the number of Mexican companies attracted over two years, the total combined revenue of those companies for two years, and finally, the sustainability of those companies and their business models.
²¹

On the heels of this successful launch, HeroX is now developing dozens of challenges in dozens of cities. In conjunction with the city of Los Angeles, there's a challenge being designed to decrease traffic on Interstate 405. Simply Music is using HeroX to create a virtual piano so that musical expression is no longer tied to physical instruments. The education software giant Ellucian is using HeroX to increase student retention and graduation rates, and a fifteen-year-old high school student, Eli Wachs, is using HeroX to show the world that young people are change makers.

But the real point here is accessibility. HeroX is helping build a passionate and knowledgeable community of prize developers who can help any entrepreneur design a prize, launch a prize, use crowdfunding to supplement the purse, operate the prize, and ultimately judge and award the prize. The big goal is to change people's mindset—to help them realize that they no longer need complain about problems, but now can launch an incentive competition to solve them.

My goals in this section are twofold: first, to help you to identify a prizable topic useful to you and your business, and second, to help you design your own incentive challenge with HeroX. But we'll begin by considering why you might use an incentive prize in the first place. What are the benefits to you, your company, and society?
²²

1. 
Attracting new capital to innovators solving the problem.
We normally think of government agencies or big corporations as the primary funding sources for innovation. Yet, incentive prizes attract a very different, nontraditional pool of resources to
the innovation game, specifically billions in resources normally allocated for both philanthropy and sponsorship.

2. 
You pay only the winner.
Prizes are efficient. They generate an enormous amount of innovation—often enough to create an entire industry—but you have to pay only the winner, none of the teams who attempt and fail. In the case of the Orteig Prize, most of the famous aeronauts of the time failed miserably, while Lindbergh, a relatively unknown pilot who was called the “Flying Fool” by the press, won the competition. Had Orteig been investing in teams, Lindbergh would have been the least likely to get an endorsement.

3. 
Crowdsourcing genius.
Prizes attract new players—outsiders, mavericks, and other innovators unlikely to work within a traditional research setting. A properly structured incentive prize will draw on a much larger global talent pool than traditional research efforts, pushing the world's best and brightest minds (independent of age, race, and gender) to work harder, faster, and sometimes collaboratively (on the same team).

4. 
Increasing public awareness and raising the visibility of a problem.
The publicity generated by an incentive prize serves an educational function, focusing attention on the importance of the problem. In turn, this global media attention motivates the competing teams to work harder and, in many cases, take bigger risks.

5. 
Overcoming existing constraints.
Incentive competitions reconfigure what is possible by transcending societal constraints, legal/regulatory hurdles, and policy regimes. Prizes don't care how old you are or where you work; they measure only the quality of your idea and its execution. As such, solutions constrained by stodgy CEOs or self-reinforcing labor unions can be accelerated into action.

6. 
Changing the paradigm.
Incentive competitions help change the paradigm of what people believe possible. Before Lindbergh's flight, aircraft were for aeronauts and daredevils. Afterwards,
they were for passengers and pilots. The general view of transatlantic flight was transformed, paving the way for the emergence of the airline industry. Before the Ansari XPRIZE existed, space flight was a game played by governments; afterwards it was open to anyone.

7. 
Launching an industry, with lasting benefit and impact.
An incentive competition should be designed so that the awarding of the purse is not the end of the story, but rather the beginning of a new industry. To this end, innovation alone is not sufficient. To drive the kinds of breakthroughs that benefit humanity, these innovations need to be brought to market. Ultimately, the goal is to solve the problem and stimulate entrepreneurship, bringing about a new set of products and services that serve as the backbone for a new industry.

8. 
Providing financial leverage.
A well-constructed challenge can easily generate investments an order of magnitude greater than the purse. Innovators and investors are typically willing to invest more than the amount of the purse for two reasons. First, most competing teams are typically optimists. They initially believe they can win the competition by spending less than the purse amount and then incrementally rationalize larger investments over time. Second, a properly designed prize has a back-end business model that allows teams to capture a return on their investment.

9. 
Creation of market demand.
Before the Orteig Prize, there was no public demand for transatlantic airline flights because few believed such a crossing was even possible. Such was the situation with space flight and the Ansari XPRIZE. Successfully designed and executed incentive challenges create significant market demand, which tends to establish markets and attract investment capital.