When and why to use different mechanisms for solving problems and funding innovation.

When it comes to funding innovation and solving complex problems, the choice between a grant and a prize can significantly shape both the process and outcomes. While these mechanisms share the goal of advancing solutions, they operate with distinct philosophies — one traditionally pushing known approaches forward with targeted awards, the other pulling solutions forward with incentives and resources. For funders seeking maximum impact, understanding when to deploy each of these powerful tools — and how to combine them — can amplify the ability to catalyze meaningful change.

Luminary Labs has been tasked with designing and producing funding mechanisms on behalf of public, private, and nonprofit organizations, representing more than $350 million in potential incentives for accelerating effective, scalable solutions. After more than a decade of this work, we’re answering one of the most frequently asked questions about innovation funding mechanisms: What is the difference between grants and prizes? When should you use one instead of the other? How might you use them together?

How grants and prizes are similar

It’s easy to see why the terms “grants” and “prizes” are so frequently used interchangeably — they have a lot in common. Both are funding mechanisms used by philanthropies and governments to meet specific needs or solve specific problems. They are often structured as a competitive process — with application and review periods — that award money to outside entities that advance work in a specific domain. They can both scale to different sizes, awarding large sums of money or smaller awards to large numbers of recipients or small cohorts of solvers. Both grants and prizes can unfold over time, with stage gates or phases. Both can also be sponsored by a single funder or by collaborations and partnerships: Some grants are sponsored by donor collaboratives, pooled funds, or coalitions of like-minded funders; similarly, some prizes are sponsored by partnering philanthropies or public-private partnerships.

Major differences between grants and prizes

Grants are more traditional “push mechanisms” that fund specific activities. Prizes are “pull mechanisms” that reward results, and even though they’ve been used for centuries, they’re considered nontraditional incentive mechanisms. Beyond what’s funded, these mechanisms often diverge in several other ways:

• Risk and control. Grants often prescribe particular approaches or end solutions, evaluate how a proposed approach meets defined tasks, and fund execution of specified, approved activities. Prizes, on the other hand, require the funder to relinquish more control: They encourage creative approaches and a variety of solution types, evaluate how the work submitted meets defined criteria, and award flexible, non-dilutive funds and resources that can support acceleration.
• Visibility. Grant opportunities are often publicized through traditional channels to a known audience already working on the problem, and as such, can be more exclusive. Prizes often issue a public, open call to attract both known and unknown solvers, including those who may not be working on the problem yet.
• Requirements. Grants typically require more reporting and documentation, including prescribed metrics for data collection, and the initial applications are often quite lengthy, setting a high bar for participation. Prizes usually offer “no strings attached” awards that do not require recipients to report on how the funds were used, and submission forms are often designed to lower the barriers to entry and make it easier to engage.
• Eligibility. Grants are often restricted to specific types of entities — for example, nonprofit organizations or academic institutions. Prizes can define the terms of who is eligible, and can be awarded to individuals, teams, or standalone organizations. Prizes often incentivize teaming, collaboration, and the formation of new ventures.
• Timing. Grants often have longer timelines than prizes, which typically emphasize rapid acceleration of solutions and yield results more quickly.
• Incentives. While some grant programs provide guidance and direction, the primary incentive is typically monetary funding. Prizes can offer a range of incentives, including money, recognition, and networking, as well as resources like data, hardware, software, technical assistance, and access to subject matter experts.

When to use a grant instead of a prize

When great solutions already exist but need funding to iterate and scale, grants can be valuable mechanisms to provide the necessary support while ensuring accountability and reporting. A grant program may also be the right option when a funder already knows the ecosystem of practitioners who are working on solving a specific problem. In philanthropic organizations, traditional grant mechanisms are often led by a program officer who establishes ongoing relationships with solvers and ensures growth and impact over time; this steady support can enable long-standing, financially sustainable funding streams for nonprofits.

When to use a prize instead of a grant

Prizes are higher-risk, higher-reward mechanisms for shaping new markets or advancing innovations that don’t yet exist. When a market is especially nascent and the solution is not clear — or when push mechanisms like grants won’t deliver an innovation fast enough — pull mechanisms like prizes can accelerate innovation by inspiring a diverse group of innovators to rapidly create, test, and deploy new solutions. Many sponsors use the visibility of public prizes to highlight a problem and engage new and unlikely solvers and solutions; even smaller awards can shape markets and expand ecosystems. The trade-off, of course, is risk: Sponsoring organizations have less control over who participates, and submissions can include both anticipated and unexpected solutions.

How grants and prizes can work together

Prizes can serve as an efficient complement to traditional grantmaking programs. A sponsor organization can use a prize to build a pipeline of potential grantees, issuing an open call to discover new solutions and build a network of solvers. After providing resources and support to advance a cohort, the sponsor can fund the most promising solutions with grants, contracts, advance market commitments, or other mechanisms.

Organizations that use both prizes and grants may find themselves adapting the best of both. Grants that are influenced by prizes might embrace the ethos of providing funding with no strings attached: MacKenzie Scott’s Yield Giving has distributed more than $19 billion to more than 2,400 nonprofit teams “to use as they see fit for the benefit of others.” Prizes might also inspire more open approaches to attracting diverse cohorts of grantees: Pivotal, founded by Melinda French Gates, issued a global open call for its $250 million Action for Women’s Health. Likewise, prizes that learn from grants might build trust and long-term relationships between funders and solvers.