Creating a Marketplace for Outcomes
Audio Brief
Show transcript
This episode explores the transformative power of funding outcomes rather than just research, featuring Tom Kalil, CEO of Renaissance Philanthropy and former White House technology advisor.
There are three key takeaways from this discussion. First, governments and philanthropists should shift from push funding to pull mechanisms that pay only for successful results. Second, defining a rigorous Target Product Profile is essential for guiding innovation without micromanaging the method. Third, market-shaping tools like Advance Market Commitments can de-risk private investment in critical areas where natural markets fail, such as vaccines or green technology.
Tom Kalil argues that the current landscape of innovation funding is inefficient because it often relies on grants or loan guarantees that insure against failure. He proposes a fundamental pivot toward pull mechanisms. In this model, a sponsor promises a reward or a purchase order if, and only if, a specific outcome is achieved. This structure shifts performance risk from the taxpayer or donor to the innovator, while simultaneously guaranteeing a market if the project succeeds. The success of SpaceX serves as a prime example. Instead of dictating how to build a rocket, NASA defined exactly what the rocket needed to do and promised to buy flights upon success. This approach allowed for diverse technical solutions and massive cost reductions.
Central to this strategy is the concept of the Target Product Profile. When commissioning innovation, leaders must focus on the "what," not the "how." By specifying precise performance metrics such as the cost per ton of carbon removal or the efficacy of a vaccine, sponsors can organize talent and resources around a clear goal. This clarity creates a gravitational pull for ambitious researchers and entrepreneurs, aligning their efforts even before funding is disbursed.
Finally, Kalil highlights how these tools can solve the anti-portfolio problem, which refers to high-impact issues that venture capital ignores due to a lack of immediate profit. By using Advance Market Commitments, policymakers can create artificial demand certainty. This unlocks private capital for neglected fields like antibiotic development or climate solutions, effectively aligning social value with financial reward.
In summary, shifting the focus from funding effort to funding outcomes offers a proven blueprint for solving the world's most complex challenges.
Episode Overview
- A Shift in Funding Models: Tom Kalil, CEO of Renaissance Philanthropy and former White House science and technology policy advisor, argues for a fundamental shift in how governments and philanthropists fund innovation. Instead of traditional grants or loan guarantees based on failure, he advocates for "pull mechanisms" that pay for successful outcomes.
- The Power of Incentives: The talk explores various "market-shaping" tools—such as Advance Market Commitments (AMCs), incentive prizes, and milestone payments—that have successfully driven breakthroughs in space travel (SpaceX), vaccines (pneumococcal and COVID-19), and autonomous vehicles.
- Blueprint for Future Moonshots: Kalil outlines a framework for applying these principles to current global challenges like climate change, antibiotic resistance, and education, urging policymakers and investors to define ambitious, measurable goals to catalyze private sector innovation.
Key Concepts
- Pull Mechanisms vs. Push Funding: Traditional funding often "pushes" money into research hoping for a result. Kalil advocates for "pull" mechanisms where a sponsor promises a reward (market access, a prize, or a purchase order) if a specific outcome is achieved. This shifts the performance risk from the sponsor to the innovator while guaranteeing a market if they succeed.
- The "Target Product Profile": A critical component of market shaping is the ability to define success precisely without dictating the method. For example, rather than telling a company how to build a rocket, NASA told SpaceX what the rocket needed to do (deliver cargo to the ISS) and promised to buy rides if it worked. This allows for diverse technical approaches to solve a single problem.
- Marketplace for Outcomes Structure: Kalil proposes a triangular ecosystem for innovation:
- Sponsors: Entities (governments, philanthropists) willing to define and pay for an outcome.
- Teams: Innovators who believe they can achieve the goal.
- Investors: Capital providers who back the teams, taking on financial risk in exchange for potential returns if the outcome is met.
- The "Why Now" Factor: Successful market-shaping interventions often occur at the intersection of an ambitious goal and a technological or societal shift that makes the previously impossible now within reach (e.g., AI for science, new biotech capabilities).
Quotes
- At 1:42 - "Right now, the US government has a widely utilized mechanism for making financial commitments that are contingent on failure... a loan guarantee. ... What if the government (and other actors) routinely made financial commitments that are contingent on success?" - This quote encapsulates the core thesis of the talk, contrasting the status quo of insuring against failure with the proposed model of rewarding success.
- At 7:24 - "In this case, NASA is telling the private sector what it wants... but it is being less prescriptive on the how. ... And the government is saying, we will bear the demand risk if you bear the performance risk." - Kalil uses the NASA/SpaceX partnership to explain the ideal division of labor and risk between the public and private sectors in outcome-based funding.
- At 16:31 - "Answering these questions is not just useful for the people who are designing these market-shaping interventions. It is also super valuable from a societal point of view... These goals can inform the aspirations of ambitious researchers, entrepreneurs, philanthropists and investors." - Here, Kalil explains that the mere act of defining a clear, ambitious goal has a gravitational pull that organizes talent and resources, even before the money is spent.
Takeaways
- Define the "What," Not the "How": When commissioning innovation or trying to solve a complex problem, focus on creating a rigorous "Target Product Profile" that specifies the required performance metrics (e.g., cost per ton of carbon removal) rather than micromanaging the technical approach.
- Create Demand Certainty to Unlock Supply: If you are a philanthropist or policymaker, use your capital to guarantee a market (like an Advance Market Commitment) for solutions that don't yet exist. This de-risks the investment for private companies and encourages them to enter neglected fields like vaccines or green tech.
- Identify Under-Incentivized "Anti-Portfolio" Problems: Look for high-impact problems that traditional Venture Capital ignores due to lack of a natural market (e.g., antibiotics that are used only briefly, or preventative measures). apply pull mechanisms specifically to these areas to align social value with financial reward.
