Key characteristics of Challenge Funds

This article draws on an extensive literature review and follows from the previous article outlining some key points to consider when designing a challenge fund. Here we look more closely at the key characteristics of challenge funds. Clearly, a challenge fund is a particular kind of funding instrument, but transparency with regard to the specific nature of this instrument helps to understand the role that a challenge fund may play in the innovation landscape.

Conceptualising Challenge Funds

Challenge funds were first developed as a way of introducing competition to the public sector. Challenge funds create a competitive environment in which a selection of actors compete to successfully deliver on a challenge. However, challenge funds also foster cooperation by, for example, encouraging companies and challenge holders to work together, making it better to think about the goal or orientation of a particular challenge fund and its nature. The Cardiff Capital Region (CCR) Challenge Fund is keen to encourage collaboration between partners who act as challenge holders, for example see the recently announced Sustainable Food Challenge that is being delivered in partnership by Cardiff and Monmouthshire Councils.

A challenge fund operates by setting a goal and inviting others to achieve this goal (Copestake et al, 2015). While simple, this view allows us to keep in mind both the cooperative and competitive dimensions of the challenge fund because it may generate spaces in which people form communities of practice (CoP) through which they develop ideas and innovations, but at the same time, are aware they operate in the context of an overall competition. Most challenge funds provide resources for which innovators or ‘solution providers’ compete. In our recently completed Simulation Training Challenge, led by Cardiff & Vale UHB, two firms that were successful in the initial competition were supported through the co-development process to deliver new solutions.

The decisions on the goals of a challenge fund are not neutral and can be varied. Typically, however, challenge funds are interested in bringing about innovation.  Pompa (2013) emphasises how challenge funds create the conditions that allow applicants to innovate. But the emphasis on innovation also introduces normative ideas into the challenge fund. Who decides what is a challenge that an innovation can resolve or is an issue that only needs additional resources or skills? How can a challenge fund decide that an idea is innovative and does not just reconstitute existing ideas? And how can a challenge fund assess what is innovative in vastly different areas? These more substantive issues need to be dealt with in the operation and management of challenge funds and will inform topics in a later article.

Defining Challenge Funds

Although we can conceptualise challenge funds in terms of the goal of bringing about innovation, this does not help us distinguish challenge funds from other kinds of innovation policy mechanisms. To do this we need to drill down further into the component parts of a challenge fund.

Focusing on what makes challenge funds different from other innovation policy mechanisms means identifying the properties of challenge funds. Copestake et al (2015) arrive at the following definition of a challenge fund, building on their goal oriented nature, wherein one agent sets a goal, and the challenge fund invites others to achieve this goal:

A challenge fund (1) provides grants or subsidies (2) between legally independent agencies (3) with an explicit public purpose defined by the grant provider (4) on the basis of publicly advertised rules and procedures, where (5) grant recipients are selected competitively and (6) retain significant discretion over formulation and execution of their proposals (7) but share risks with the grant provider.

Copestake et al (2015) develop this definition with the intention of integrating the idea of a challenge with a financing instrument. In a sense, the challenge fund is just a mechanism that can be used to bring a new idea into existence. This definition leaves the negotiation and selection of the idea to one side and focuses on the connections between individuals and organisations that the fund forges. It is also silent on the impact of work produced by challenges. What happens after a solution to a challenge has been developed is for the challenge holder to decide, but it may be that more attention should be paid to this dimension by the challenge fund and challenge holders than is suggested in the existing literature. In evaluating proposals to the CCR Challenge Fund, careful attention is paid to the potential that these proposals have for both creating new economic opportunities and for addressing societal issues.

Copestake et al (2015) analysed the differences between challenge funds and other kinds of financing mechanisms. Their work showed how challenge funds were indeed different from other funds (i.e., Managed Funds, Advanced market commitments, Social Impact Investments) in at least one way and they conclude that challenge funds are in fact a different kind of financing mechanism. Interestingly, they also note the strong similarities between challenge funds and challenge prize funds. Copestake and O’Riordan (2015) felt that p funds tend to reward past endeavours and are less clear on the purpose of the fund, while challenge funds are more future and goal orientated. However, since challenge prizes can be goal directed and provided to participants using a scheme of mini-prizes instead of a large single prize to an overall winner, in practice the difference between the two approaches may not be that large. Nesta have a long track record of designing and delivering Challenge Prizes and their website has some very useful information for those considering this approach.

Types of Challenge Fund

The research literature distinguishes two types of challenge fund: those that focus more on ‘enterprise’ and those that focus on ‘civil society’ (Copestake et al. (2014), Davies and Elgar, (2014)).

Interestingly, the research literature tries to draw a clear distinction between these two approaches. The literature describes enterprise challenge funds as focused on business and markets but doing so with a social conscience. Civil society focused challenge funds, on the other hand, are orientated toward achieving goals that will have wider social and economic benefits. However, both types have some economic and social benefit in mind, and so the distinction may be more of degree than of type. That is certainly the case with how we have developed the CCR Challenge Fund to date. Individual challenges have all contained elements of both business and societal benefits with the emphasis varying according to the specific goals and opportunities.

Summary

Challenge funds provide a funding instrument that brings people together to form connections with the goal of resolving a challenge. As a financing instrument, the challenge fund model does differ from most other financing mechanism with the exception of challenge prizes. Finally, although challenge funds may differ from one another, these differences may vary depending on the challenge being addressed and are likely to combine the interests of enterprise with an interest in a public purpose. In our next article we will consider how challenge funds operate and issues that arise in identifying and selecting challenges, and promoting challenges to potential solution providers to encourage responses.