Puneet Mehta, Archana Patchirajan, and Sonpreet Bhatia all had lucrative day jobs as technologists at big Wall Street firms when they learned about the NYC BigApps competition last October. New York City Mayor Michael Bloomberg was calling on software developers to create mobile apps based on newly released city data. The two-month deadline gave the three Indian-born developers the incentive to build out an idea they had only talked about before. After 40 days, they had a one-stop application called NYC Way, which puts a compendium of city information at users' fingertips.

Their efforts were rewarded with $5,500 in cash prizes, a meeting with the mayor, and an overwhelmingly positive public reception for their product, which has become a popular download through Apple's App Store. Encouraged, the three partners quit their jobs and co-founded a business called MyCityWay, which now markets similar apps for seven additional cities and multiple platforms, earning revenue through partnerships. In April, the company received $300,000 in seed money from the NYC Entrepreneurial Fund, a new city fund set up to invest in start-ups. The company expects to make its first hires this summer.

The story of MyCityWay illustrates the power of prizes to drive innovation and entrepreneurship. It also explains why the so-called prize economy is growing so fast. A 2009 McKinsey & Company report found that total funds from prizes have more than tripled over the past decade and now surpass $375 million. Some competitions are wildly ambitious: Over the next 10 years, the nonprofit X Prize Foundation, for example, plans to put up more than $100 million to address challenges in energy and the environment, ocean and space exploration, life sciences, and education and global development. In 2004, the foundation awarded $10 million, the largest prize in history, to the creators of a suborbital spacecraft, which catalyzed investment in the nascent private space industry. Richard Branson founded commercial-spaceflight venture Virgin Galactic using the winning team's technology and spun out a California-based venture called the Spaceship Company. What's more, since the prize was awarded, more than $1 billion in public and private funds has been invested in the private spaceflight industry, moving it from the realm of science fiction to business fact.

Business schools, which have long sponsored business plan competitions, also are beginning to think big. Rice University, for example, offers $1 million in total prize money. MIT's Clean Energy Prize, established in 2008, offers a grand prize of $200,000, with half coming from the U.S. Department of Energy and half from a regional utility. Over the past three years, more than 200 teams from more than 60 schools have competed. More than a dozen alumni teams have launched businesses, raising more than $65 million in additional funding. But money is hardly the object, insists Georgina Campbell, an MIT graduate student researching prize design. "By the end of a competition," she says, "teams have probably talked to a hundred people about the ideas. They've built networks. They're ready to launch a business -- even if they're not the winners of the money."

Bottom Line A revved-up contest economy will harness the competitive spirit to launch a wave of businesses.