Bruce V. Bigelow

Xconomy

Fourteen years after Peter Diamandis proposed the idea of creating the X Prize to spur development of low-cost spaceflight, San Diego-based Prize Capital said today it has entered the final phase of creating a $10 million prize to encourage advances in algae biofuels technologies.

As part of the final planning process, Prize Capital founder and chairman Lee Stein convened a workshop of 26 leaders to draw up rules and other criteria for what Stein calls the $10 million Algae Fuel Prize. The group met for much of the day at UC San Diego’s Scripps Institution of Oceanography, and Stein told me during a break he had invited venture investors, scientists, environmentalists, and business and government leaders from across the country. But he was not willing to say how long final planning will take before the competition will be unveiled.

“I don’t know how much more work will be needed,” Stein said. “You can’t change the rules after you start.”

In announcing the algae fuel prize, Stein cited the historic success of prize competitions, including Charles Lindbergh’s first flight across the Atlantic Ocean and the $10 million Ansari X Prize. The X Prize was claimed in 2004 by acclaimed aerospace designer Burt Rutan, whose project was supported by Microsoft co-founder Paul Allen.

Stein acknowledges that significant government and venture funding already is flowing to develop commercial fuels from algae. But he said creating a prize competition provides an added incentive by stimulating additional research and by attracting worldwide public attention to specific aspects of a problem. For Stein, that means calling attention to the energy needs of the developing world, which represents the fastest-growing source of carbon dioxide emissions. He said there are billions of people in developing countries “who are living on a $1 a day—and if they get a second dollar, it goes to buy fuel.” Stein hopes that fuels derived from algae, which absorbs carbon dioxide before it is harvested for fuel production, can become a cheaper and cleaner alternative to burning wood, coal, and dung in developing countries.

Prize Capital’s announcement is the culmination of work that began more than a year ago, Stein said, when initial planning began at the Washington Renewable Energy Conference. “We started by deciding we would do something that focused on energy and the environment,” Stein told me. Over time, he expanded the number of people involved in the process and gradually settled on developing a biofuels prize based on algae.

Prize Capital’s planning for the competition must be both meticulous and comprehensive because the Algae Fuel Prize also represents the first application of Prize Capital’s alternative venture funding model. Under this model, Prize Capital provides working capital to select teams that enter a competition as a way of providing financial leverage so teams of all sizes have sufficient resources to actually develop innovative technology.

In the algae competition, Prize Capital proposes to:

—Create a prize focused in an area that has been fully vetted, so that the competition can both accelerate innovation and create investment opportunities.

—Form a master limited partnership to fund teams.

—Reach agreements with teams that accept funding that include terms for subsequent investment rounds as competitors succeed in advancing their technologies.

—Allow teams to opt out of the investment rights.

Investors will own a percentage of equity in all direct competitors supported by Prize Capital. The firm says its investment model mitigates risk and enables investors to share in the success of multiple companies beyond the competition by spurring the development of commercial applications from multiple teams, and not just the winner.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call 858-202-0492

http://www.xconomy.com/san-diego/2009/04/28/prize-capital-moves-closer-to-creating-10-million-algae-fuel-prize/