One way to build a product is to take the idea for it, and go out and try to get someone to fund its development. That's the philosophy the venture capital economy is based on. But ideas and money can flow in different directions. Prizes, for example, can fuel amazing innovation. In this development model, a bucket of money is set aside to fund a goal, and the first team to achieve the goal gets the money. The X Prize suborbital flight--funded by an insurance bond--is the currently-famous example of this. Also, Charles Lindbergh flew across the Atlantic and won a prize.
Now there's BigCarrot, a social site designed to help individuals create their own challenges, contribute to other challenges, and evaluate the contestants before the prize money is awarded.
Anyone can set up a challenge on BigCarrot and get other people to contribute to it. The site's premier test case is the creation of a free, open-source .Mac competitor. A guy in Wisconsin, Ben Spink, won the challenge and collected the pool of money, $8,622, that 172 individual funders had put up for it. The average contribution to the "NotMac" fund was $25.
Prizes are awarded based on the votes of the funders. Every person who contributes gets one vote (the amount of money people put in is not a factor). Once the community decides they have a winner, the escrowed funds are transferred.
Here's what prize funders directly get out of contributing to a challenge: Nothing. Yes, they can exercise their passion or beliefs by contributing money to causes that they like. And yes, if the challenge results in social change or the delivery of a product they like, they can benefit from it. But there's no direct payback. Contributors don't get shares in the inventions (at least not yet).
It's important to note that contributors' funds for a challenge are not pledged or earmarked. They're actually paid up front. If you want to fund a project, you transfer your money to BigCarrot. Some other similar systems, such as ThePoint, use pledges, but BigCarrot CEO J. Kent Pepper said it would be too hard to guarantee pledge deliveries, especially for challenges that take a long time to win. The interest on the escrowed money is BigCarrot's revenue stream, so if this concept takes off, the company will become filthy rich. Pepper said he'd like it to become philanthropic.
So contributors will never get their money out, even if a challenge is never won. Pepper told me that if a challenge has no activity (in the forums on the site, among other places) for more than two years, the funds earmarked for it will get redeployed to a newer, hopefully related challenge.
There's also no simple way to put a time limit on a challenge, such as the one the X Prize had on it. I think deadlines are important, but having them would force the issue of returning money to funders on the unfulfilled challenges.
While I have strong doubts that BigCarrot will become the clearinghouse for incentive-driven invention and see a huge amount of cash flow through it, it a cool social experiment in direct action. Prizes can excite entrepreneurs to create clever solutions to any kind of problem, and letting individuals contribute gives them a piece of the satisfaction when the prize is won. I would hope to see more direct payback to the funders in the future, though.