Most people probably know Vanguard as the firm that you can buy index and mutual funds from. They were the first investment group to offer index funds to individual investors. On this week’s episode, we look at how they are continuing to innovate. Warren leads a group that is doing both inside-out and outside-in innovation. It’s a great conversation, three things I encourage you to specifically focus on as you listen:
- The way they approach startups and how they think about those collaborations.
- The synergies experienced between outside-in and inside-out.
- How they think about talent and mindset.
I also hope you’ll consider subscribing to Agile Giants if you haven’t already on:
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Sean Ammirati (00:08):
Welcome to Agile Giants lessons from corporate innovators. I’m Sean Ammirati, your host. Co founder and director of the Carnegie Mellon Corporate Startup Lab and partner at the Early Stage Venture Capital Fund Birchmere Ventures. Each week, I’m going to talk to guests who are experts at creating startups inside large corporations. I believe fundamentally a startup within a company is the same as one inside the proverbial garage, a group of entrepreneurs, trying to make the world a better place using new ideas and inventions. However, I also believe some of the techniques and processes are just inherently different. This podcast is going to explore those similarities and differences.
Sean Ammirati (00:56):
On this week’s episode of Agile Giants. I’m joined by Warren Pennington. Warren really is a model corporate entrepreneur with the work he’s doing inside Vanguard. He leads a group of about 20 individuals that do both inside-out and outside-in innovation. They partner with startups and create new solutions together, which those startups then are able to go bring out into the market and work with other financial service companies as well. They also create brand new offerings internally and actually leverage other resources from across the firm to create those. There are clearly lessons with both those activities.
Sean Ammirati (01:36):
I want you to pay attention to a couple of things. First of all, the way they approach startups and how they think about those collaborations. Many of your organizations could probably pick some best practices up from. Second, and this is a recurring theme across the episodes. It’s a false choice, many companies back into, should we build these things internally? Or should we partner with startups? The answer is not either, or, but as I’ve said before, it’s both of those. Finally, I think the way Warren thinks about talent and mindset is something that many of your organizations can learn from. Both this perpetual search for the right talent to get involved, as well as, as he talked about the work that his CEO and he have collaborated on. Trying to incorporate this “founder’s mindset” as they say into the organization. There’s a lot in this episode. I hope you enjoy it. As always, thanks for listening.
Sean Ammirati (02:36):
Warren, thanks so much for joining me on Agile Giants. I thought what would be great to start with is just talk a moment about your career before coming to Vanguard. Then we can talk a little bit about what you’re doing for Vanguard.
Warren Pennington (02:48):
Great. Thanks a lot Sean. I think that my career path is a little interesting. I actually had intended to be in the engineering field. My education, I did a couple of engineering degrees. I ended up working my entire career so far in finance. Financial services. I started off in banking. I worked in San Francisco, Wells Fargo left in 2005. A couple of years before the crisis came to the East Coast and started working as an asset manager out of Philadelphia. Then Delaware investments, they were owned by Lincoln financial. I rode that through the financial crisis, they were sold during the crisis to acquired banks. I started working for an investment bank. Worked up in New York city and then ended up coming down to Vanguard in 2012 to start this phase of my career. I’ve been there ever since.
Sean Ammirati (03:41):
Yeah. Let’s talk about this phase of your career. It’s interesting. You’re bringing innovation in, especially in the FinTech space into Vanguard. Talk a little bit about your role inside Vanguard.
Warren Pennington (03:54):
Couple of years ago we were into the discussions around how Vanguard could be innovative and disrupt itself again for the next decade effectively. There were a couple of initiatives going on. There was one broadly focused on the client side of the business. There’s an innovation studio that was opened up 2017. At the same time I’m working in the investment shop, which is the part that manages the funds and runs the money. We have a very different business model and a very different business environment. We created a team within the investment shop that I lead. It started off with a couple of people and the mission was, to go figure it out.
Sean Ammirati (04:36):
I guess talk a little bit about the stuff you’ve done. It’s grown from just a couple of you to a little bit larger group now. How do you frame out the mandate of this FinTech strategies that you’re focused on?
Warren Pennington (04:53):
The mandate is really to find and explore new technologies that could dramatically change the business for Vanguard, especially on the investment side. When we first started off, the main thoughts we had were two things. One is that the search for talent is really difficult. Vanguard headquartered in Malvern, Pennsylvania. It’s already a challenging location to recruit for the kinds of talents that we were looking for were more on the advanced technologies, emerging technology spaces, that folks that go to work for big tech or New York hedge funds. Talent was a huge focus on that. Technology was obviously the corollary.
Warren Pennington (05:34):
There was an idea that while Vanguard has traditionally done everything in house, realistically, it’s been … You start at Vanguard and you work your whole career there and they build internally. That’s been the tradition. We went the other route and said, “There’s a lot of smart people outside the company. It’s really hard for them to engage with. Nobody’s actually actively looking for them other than recruiting.” We started this partnership strategy that has become so common with some of these large companies like ours, where we’re trying to make it easier for these startups to actually work on problems that would fit Vanguard strategy. We in turn give the startups more interesting ideas and help them grow their business.
Sean Ammirati (06:17):
We think a lot about, there’s inside-out innovation where the innovation comes from the end and it pushes out, and then there’s outside-in innovation, where you’re partnering with these startups and academic institutions and all these things to bring new thinking in. I think this is a great model of the ladder for what it’s worth. Talk a little bit about what startup is a good fit to work with your group inside Vanguard. If an entrepreneur is listening, how do they know if they should, try to plug into your infrastructure or not?
Warren Pennington (06:50):
I think we’re trying to be ambitious and be both. I think the reason that it actually helps me answer your question, because what we know differently than others, what gives us an edge is we understand the Vanguard strategy and what our businesses is up to. We have inside information about what we’re doing and what we want to do. We bring those ideas. Then we think about ideas of what could make a difference longer term. We frame out three broad areas that we’re focusing on from a technology standpoint. If you have a startup, you want to know what kinds of technologies or big companies are interested? What kinds of problems are they trying to solve? We try to explain both. One is the data analytics space, what we’re calling data science. The real fun name is AI, but really it’s, can we get more data in and we can refine the insights from it?
Warren Pennington (07:38):
We’re exploring that. That gives the investment professional new insights so they can make a better decision about what to invest in or what to trade or when. The second piece is, platform technologies. We are Cloud fans and building software in a new way and building platforms in a new way is really part of the mission. There’s a lot of interesting technology in that space that would help us take those insights and then work with them in an environment, what we call a platform. The third space is the way the capital markets work themselves, market infrastructure. That’s also a Cloud discussion. It’s things like how do markets work? What kinds of ways do markets work that [inaudible 00:08:21] buyers and sellers engage efficiently and fairly. When we think that it doesn’t happen efficiently or fairly, we want to fix that. We think that technology could be part of that solution. There’s a space where things like distributed ledger or Blockchain fit in there, for example.
Sean Ammirati (08:35):
Interesting. Is there a stage emphasis? How early or mature are these startups typically?
Warren Pennington (08:43):
Our team has decided that the best stage to find and probably work with companies are when they’re forming, so they’re forming the product. There has to be a company, the company is formed, early stage and that might be before a series A, it might be during a series A. Depending on the size of company, it could even float into followups or series B, but it’s generally a fairly small company, ideally highly engineering focused. It hasn’t gotten to the stage where you had to hire a bunch of salespeople to crank up revenue, to support growth projections from the investment, from the investors and things like that.
Sean Ammirati (09:20):
That’s good. What’s the economics for a startup engaging with you guys?
Warren Pennington (09:27):
The economics are, I guess, multifold. There’s some intangibles. It’s always valuable to have paper with a big name company.
Sean Ammirati (09:35):
Warren Pennington (09:36):
We start off with an NDA. You actually have a contract with us to a degree, a very straightforward one. We move into proof of concept type experimentation with each other. We don’t have the bandwidth. We have about 20 people, or so right now Nick’s team. About two thirds of that number is focused on the innovate within. The internal proprietary work. The other third is working on leveraging partners. We really have to be careful of who we work with and pick those out. It’s the partnership aspect that comes to play. If you’re in a niche where you want to have a big name company, particularly an asset manager in Vanguard would probably be a good one to have.
Warren Pennington (10:21):
We try to be fair, but we also recognize from both sides. We want to have that open discussion that there isn’t a product yet. We’re not going to be able to come up with commercial terms when we start, because that’s not the point. The point is to help us and the startup develop their commercial viability in a particular space. We also choose the types of projects and products to work with on them that we hope can be leveraged beyond Vanguard. When we engage with an external party, we tend to try to do that in a space where it’s not going to be something highly proprietary. They can only sell it to Vanguard longterm. We try to work on defining the problem set so that they have a broader market opportunity there. Then we’ll help ease the opportunity to get into a master service agreement or some sort of a more formal contract statements of work.
Warren Pennington (11:10):
We at minimum try to cover costs. Obviously if we can get a free experiment or a free proof of concept that lowers the risk for both parties. We make it simple. We go in with good faith effort and say, “Listen, don’t work too hard. We want to just get something going quickly and test it out.” In that way, we’re a really hands on team. That helps weed out the types of firms that don’t have the right mindset or the skill or the willingness to work and that sort of thing.
Sean Ammirati (11:38):
I do want to just ask one clarifying question, and then I want to come back to this inside out, outside in thing. You said, you try to carve out areas where people you’re okay with them bringing the service to other firms as well. I guess there’s no exclusivity then when they work with you, where they can’t go work with Goldman or BNY Mellon or whomever is that right?
Warren Pennington (12:04):
So far we have tried to avoid that. One of the reasons why is. Because, other firms do that. There’s a chance to find a partner that might have been nervous to get involved with the big players. The longer term players that have been in this space for a long time. The reality too, is we actually do look, we consciously look for firms that don’t have a Goldman or other big investment bank on their cap table yet. Vanguard has been disrupting, it sounds trite, but we have literally been disrupting since we were formed.
Sean Ammirati (12:38):
Warren Pennington (12:38):
What we feel internally is we have enough confidence in our business model and our business. That what we’re looking for solving commoditized problems. We want to commoditize certain types of problems. We don’t think that there’s any competitive edge in wrangling data and preparing it to do analytics. What we feel is if we could get that data available easier and less expensive than some of the incumbents. Then we will go ahead and figure out our internal uses of that data and everybody’s happy. That gets sold broadly across the market. It brings cost down in general, which again, serves our interests and we’re happy.
Sean Ammirati (13:12):
That’s awesome. Let’s talk about the inside out part of this too. How do you pick problem areas to evaluate and try to focus on inside out versus going and looking for partners?
Warren Pennington (13:29):
The team itself has a mixture of skillsets and talents and what we try to do, we have a picture of Venn diagram with three bubbles on it, and there’s an investment acumen aspect to people we want on the team. There’s a creative technology skills, we want hackers on this team and there’s the data analytics, the data science skillset. We’ve been recruiting and bringing in folks with all these amazing new tools and skills to handle massive and complex datasets. We look for the overlaps. We want to have two out of three at minimum, and we always build towards that center where you have all three.
Warren Pennington (14:03):
What that does, is it allows us to understand and think about things outside of the box and come up with what we feel are compelling opportunities to pursue. We always do that at some stage with a partner, from one of the specialist areas. Maybe we’ll bring in somebody from our fixed income portfolio management or our equities trading team or our currency trading. That’s how we internally, we start to figure out what are the things we should be working on. We don’t start with the technology, we start with a business opportunity and idea. That’s how I feel. We’re an inside out.
Sean Ammirati (14:40):
When you’re saying, bring people, and those are other Vanguard people you’re bringing in, in that context. Whereas, in the outside in, it’s you’re bringing in a startup or a newly formed group, that’s about to become a startup. It sounds like you guys go pretty early, but it’s external parties versus the inside out, would be you plus additional resources from the Vanguard organization.
Warren Pennington (15:05):
That’s correct. We created a team that has the right skills to do it alone, but we partner with an existing Vanguard professional who actually would end up using it. They might be the clients in this case. Metaphorically, the client. They help perfect the product, maybe work on the user interface, the design of the functionality, the way it’s delivered to the client.
Sean Ammirati (15:29):
Those people, do they typically come into that group full time? Or is it a side of desk activity for I guess the not part of your team, but internal resources inside Vanguard?
Warren Pennington (15:42):
The most successful efforts generally have somebody who’s so passionate that they come in. Equivalently, they’re constantly part of the effort. Not full time. We do have at least one or two people, we call internal rotation, that do full time, come on to the team. It’s from the investment side, that helps grow their skills and it helps grow our team’s skill. And everybody wins.
Sean Ammirati (16:06):
I imagine it also serves as a cultural catalyst back to the rest of the organization as well, because then they go back and they have that lens to look at their job.
Warren Pennington (16:15):
It absolutely does. I think that changing the culture. There’s three aspects to our mission. One is to do something amazing that could help improve investment performance. The second is to make the markets work better for an ordinary investor, which is what we represent as a firm is the retail [inaudible 00:16:28]. The third is what you just said. Its makes a lot of sense inside the company, but changing the culture or helping to continue to change the culture is really essential. I think that’s how companies that are really large and successful hope to stay to avoid getting stale.
Sean Ammirati (16:46):
100% this is how you avoid getting disrupted, is disrupt yourself. How do you guys think about maybe projects that have gone really well on either the inside out or the outside in and any common, success factors from those projects?
Warren Pennington (17:06):
They’re the same. That’s a really good question. I think you probably deal with this when you look at your own startups. It’s a combination of a really passionate team that has the right mix of skills, tackles … I don’t even presume that we have tackled the most important idea or project because generally we build things incrementally and you end up working right through that. If you’ve got the passionate team with a great mindset, thinking outside the box means you don’t look for a manual, you’re constantly challenging your own assumptions. Everybody has a fairly low ego.
Warren Pennington (17:42):
Low ego helps by saying, “Hey, we screwed up. This was a dumb idea. Let’s work on it differently.” It is very much a team effort, but it also, and I don’t want to underestimate. You have to have the right skills. If you have the wrong skill set on that team, then you will struggle. You get a bunch of enthusiastic people that are really excited about an idea and they can’t make it happen. You got to bring it to reality. The tagline internally for our effort is, think far, make it real. There’s a lot of people that are good at thinking far. There’s a lot of people that are good at making it real. It’s hard to do both. And that’s the challenge.
Sean Ammirati (18:18):
Absolutely. Are there any projects you’re able to talk about that have come through your program at this point?
Warren Pennington (18:23):
Sure. There’s a couple of things that have gone public. Vanguard is a culture, we don’t really publicize much of anything. Some of the firms love to publicize this for marketing, for talent recruitment. I am limited, one of the first things we actually did and we publicly announced it was, mind blowing to me because we were looking at Blockchain. Vanguard runs index funds. For those who aren’t deeply involved in that, just keep it simple. You start with an index, which is basically a shopping list and you try to exactly get that shopping list every day into your fund. Every day you’re constantly trimming, adding and changing.
Warren Pennington (19:04):
It all starts with that data. That index itself, it’s nothing but a data file or data to put into your systems and to make ourselves really efficient, the more efficient and correct that data is the better a job we do running the money and actually trading in the market. We came up with a couple of ideas around Blockchain, mostly in trading and portfolio management. We decided to tackle a less risky one on the index side. Long story short, that’s up and running in production. I believe we’re one of the only companies that has fully productionized, a distributed ledger app in a core operation. The lessons we learned there were the technology itself wasn’t the problem, the team that was going to use it was highly engaged, very inspired. They knew what they wanted to do. They saw the opportunity to automate that’s ultimately what we were doing.
Warren Pennington (19:55):
Internally the biggest hurdle was getting the company comfortable with Cloud. I would say, I don’t know if you could come up with a single startup that you’ve talked to Sean. Cloud is the key. For the big companies getting comfortable with Cloud is a big hurdle and you add onto it, some of the security features of Blockchain and the way we communicate. That one went well because we partnered really well with the internal bureaucracy, the people that are protecting Vanguard from bad things to happen, getting them comfortable with what this technology was, how it works, bringing a lot of people on board. That’s what slows everything down. That’s also the only way you can get anything done.
Sean Ammirati (20:35):
A couple of points on that. The Cloud point, it will be fascinating to see we’re recording this over the Web because, we’re living in a distributed work situation at the moment. It’s going to be fascinating to see six months from now, if any perceptions on the Cloud have changed or not. But, more if you generalize that, I think that illustrates a point about corporate startups that I think people often miss, which is, it’s very different for an external vendor to try to convince an IT organization of something versus somebody who’s perceived as a peer. It wasn’t still a sales technique for you, but I imagine it would be easier for you to sell the IT group on the Cloud than for engineers from Carnegie Mellon, starting a company, for example.
Warren Pennington (21:23):
Yeah. They have no hope. It’s hard enough for us to do it. We’ve built trusted relationships over the years with the key decision makers. When the current CEO, Tim Buckley, took over the shop. He’s the one that was running the investments team that said, “Let’s do this.” A couple of years ago. He’s now the CEO. When he took over, he distributed a book called, Founder’s Mentality to all the officers and [inaudible 00:21:45] basically encourage the whole company to read it. That book and that kind of a mindset is really the thing. Startups have that, if they don’t they’re not going to succeed.
Sean Ammirati (21:56):
Warren Pennington (21:56):
Apparently, there are lots of examples around all companies where that exists, they’re generally the most frustrated people in the company and oftentimes they leave. It’s nice to be able to have that founder’s mentality and to make things happen, but you’re right, we have to be patient. In a weird way we are the sales channel for these partners that we have.
Sean Ammirati (22:16):
That’s right. Again, this is why I’m banging the drum so hard right now, about the importance for startups to work with big companies, because I do think there’s natural synergies there. Another thing I love about what you just said is, one of the ways we talk to people at the corporate startup lab about this is that in many ways, this is helping companies rediscover their entrepreneurial roots. Vanguard was a startup at some point and by definition, every company was a startup at some point along its growth trajectory. What’s happened is sometimes they forget and they lose that entrepreneurial mindset or that founders mentality. I think what you see leaders like your CEO doing is trying to get people to rediscover that entrepreneurial mindset inside their company. I think groups like what you’re putting together become incredible. We already talked about this a little bit, but they become incredible catalyst to make that happen inside an organization.
Warren Pennington (23:18):
Sean Ammirati (23:19):
I guess if another financial service company is thinking about trying to do something like this, and I’ve been intrigued about the number of financial service companies that are all trying to take their own tack at being innovative and building groups like this. What advice would you give to a peer at another institution like Vanguard?
Warren Pennington (23:40):
Sure. A peer who was at another institution like Vanguard. My main advice would be just make sure that your CEO and board are enthusiastic supporters and believe it’s part of this key to the future of the company. You need to hear them say that genuinely because the amazing part about the bureaucracies of large organizations is the CEO and the board can be a 100% on board and it can still get killed by the middle levels of the company. You have to have a little bit of that grit to deal with … First you got to be good at building the relationships, hopefully have some relationships and some trusted partners.
Warren Pennington (24:18):
You need to find your early supporters beyond the CEO and his leadership team. Ideally, there’s a couple of enthusiastic people out there in the business who are ready to partner with you and continue to be part of your eyes and ears in the company. That inside out innovation, you need those folks to work with you. One of the things about founders mentality is a frontline obsession. You really got to know what’s going on and the bigger the company gets, the harder that is. Then the last thing I’d say is probably something that I think we validated in the way we’ve approached this thankfully is, don’t think of this as a technology thing, don’t even think about as innovation. Think about as a talent search.
Warren Pennington (25:02):
I wake up everyday and I think about, how is this team? Where is the talent? Is it inside the company? Is it on my team? Is it outside of the startup? Is it an academic institution like Carnegie Mellon? That’s how I got to meet you. That constant hunt for talent, because you have to be opportunistic. A true R&D effort from an old school company was to invent photonic computing or quantum [inaudible 00:25:24]. I don’t consider our effort R&D, I barely consider it innovation. I consider it pooling together the right people in the teams. The only thing we do differently is we go really fast relative to traditional work inside of a company. Solve really cool business problems and do it fast. Think about talent.
Sean Ammirati (25:45):
Yep. That’s awesome. All right, one last question then we’ll move to the wrap up question that I always ask. To your point, I think Vanguard has always been a little light on the self promotion. I’ve mentioned this to you when you came to Carnegie Mellon, one of our first clients for the first startup that I built out of CMU Vanguard was one of our customers, at that time, this was back, almost two decades ago. There was not a program like what you’ve put in place now for startups to plug into, but they were definitely those innovators, early adopters who were willing to take some experiments and do some interesting stuff. You guys were an incredible partner for us. I can personally vouch for the quality of the people there. I think a lot of your peers probably bang the drum a little harder, and there’s probably entrepreneurs who are going to hear this and think, “I had no idea Vanguard was doing something like this. I’d love to explore if my startups are fit for the program you’re putting together.” What’s the best way for them to connect with you guys?
Warren Pennington (26:50):
The best way is, I guess you could use my email.
Sean Ammirati (26:54):
Warren Pennington (26:54):
Really practical, firstname.lastname@example.org, but you won’t see a LinkedIn profile. What we do is we find that we don’t have a shortage of ideas. That’s one thing so the inbound unsolicited emails that I still get forwarded to me from others who have LinkedIn profiles, it tends to be clumsy. I think that the building up of a relationship and a network, which is another key success factor I think for all of us. Is we have to build this trusted network of people who can refer and vouch for folks and things like that. Hard to do it on a cold call, but never would turn away enthusiastic people with a big drive and an interest in working with Vanguard. That’s always exciting. So …
Sean Ammirati (27:38):
You guys don’t have a application form online or anything like that either, I believe. Correct?
Warren Pennington (27:43):
We consciously avoided the accelerator concept. It was exciting three years ago, everybody was doing that. It was really a good idea. We don’t have these tool set, the capabilities and the bandwidth to support it. We would be raising people’s expectations.
Sean Ammirati (27:58):
Warren Pennington (27:59):
For that longterm relationship, we want every interaction to be real and to be blunt and truthful and hopefully longterm.
Sean Ammirati (28:07):
That’s awesome. Okay. Last question. I like to wrap all my interviews with this. Some students are probably listening to this as well as the rest of the audience and thinking, Warren’s had an incredible career. Go back to finishing up at Colorado Boulder and you’re graduating and embarking on a different, but fascinating career than maybe the one you imagined as an engineer. What advice would you give to students coming out of school today who may want to have a similar successful career like yours?
Warren Pennington (28:40):
The only advice I can give is to folks who might’ve done something similar to me, which was to be highly technical. I would just advise those highly technical people to make sure they don’t undervalue the need to build relationships with lots of different people and keep track of your professors and your fellow classmates, and your internships during your college days. Don’t stop emailing the folks you worked with. Everybody’s busy and if you make it easy for somebody to remember who you are, and they were impressed with you, you obviously make a good impression.
Warren Pennington (29:14):
Those will last a lifetime. I think that I would presume that many people who start off highly technical are highly focused on building the technical skill and just love to build things. That tends to be a fairly inward looking personality. You can lose out that way. I’m a late career entrepreneur, I just realized that not long ago. It’s a great new phase of life and if I could have done that when I was just getting out of school, I might be in a different spot.
Sean Ammirati (29:43):
Warren, I really appreciate that final answer and really this whole conversation. Thanks so much for making the time today.
Warren Pennington (29:49):
Great to talk with you as always Sean. Thank you.
Sean Ammirati (29:56):
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