A group of all-star disruptors who pioneered digital stock trading, on-line retail, community-building for far-flung workers, and software M&A in Silicon Valley are now embarking on another kind of disruption, launching a special purpose acquisition company (SPAC) with plans to take a startup public. And they’re aiming at a burgeoning sector that demands more new services than any other: the gig economy.
Amazingly, the gig economy space is a universe that’s so far seen only one other SPAC-driven company debut––TalkSpace, a provider of online therapy for remote and contract workers, promoted in television ads by former Olympic swimmer Michael Phelps. The new team’s vehicle is Z-Work, a SPAC it took public on January 28, raising $230 million. They’re now talking to entrepreneurs of venture capital-backed newcomers that, in their view, present the best opportunities in the entire world of software and services for what’s known as “Future of Work” or FOW.
“This is a structural change in how people work, and COVID accelerated it,” says Z-Work co-chairman Chris Terrill. “Companies are now being forced to deal with a remote workforce, and that change means they need so many new things. It’s truly an inflection point that gives us the chance to back a new wave of world-class entrepreneurs.”
The Z-Work team is auditioning trailblazers in two distinct areas. Both were waxing before the pandemic, then boomed during the crisis. The first: services catering to the exploding ranks of “gig” workers, folks who don’t have a single, full-time employer, but labor as contract employees or freelancers. Around 40% of America’s workforce now fits that category, almost four times the share in 2005, and a double-digit gain over 2019. These are the Uber and Lyft drivers, the CPAs who book jobs through tax and audit outsourcing sites, moms who do SAT coaching after delivering their kids to school, sales people in Aspen or Ft. Lauderdale hired for peak season, and folks looking for the best online market to sell their homemade earrings and t-shirts.
“Many of these gig workers have three or four jobs,” says Doug Atkin, Z-Work’s co-chairman. “My best analyst for deals is a Wharton MBA who’s pursuing his passion in photography. In between shoots in places like Tanzania, he works for me on projects that can last a month. He probably makes over $200,000 doing financial gig-work.”
“Doctors used to think that Telehealth was beneath them,” Atkin continues. “Now, my wife has appointments with top physicians over Zoom.” Atkin believes that the gig economy is democratizing the workplace. “It provides opportunities for people who ‘don’t have the right connections’ but do great work to get jobs they otherwise wouldn’t get,” he says. “And it enables full-time moms to use skills they couldn’t otherwise use to earn money.”
Z-Work’s second market encompasses what what big and small employers need to navigate this new landscape. They’re typically dealing with two new types of workers: the gigsters and full-timers working remotely. The work-from-home demographic has exploded in the pandemic. The “remote” workforce now totals about 70% of all full-timers. Millions who last year commuted to office towers in New York or L.A. now spend their days in home offices, emailing and Zooming from their laptops in Dallas or Indianapolis. The workforce is increasingly a blend of the gig and full-timers for many stalwarts including Amazon, PepsiCo, and Intuit, all of which “flex” their payrolls by hiring freelancers in peak periods. Spotify just announced that its employees will henceforth have a choice of working from home, going to an office, or doing both.
The Z-Work team sees helping employers grapple with remote work as a sweet spot. “The hiring pool is much bigger now because people don’t need to go to an office,” says Atkin. “Employment is no longer tied to location.” Gig companies are competing with other gig companies for talent nationwide, and full-time employers are often courting the same candidates. It’s now common for a company in Chicago to hire a full-time programmer or marketing director in Iowa, whereas they’d only shopped before in cities where it had offices. A firm in Atlanta hiring accountants part-time to advise small businesses on their taxes now vies for talent with other gig outfits from all over the country. At the same time, big players in the field not previously in Atlanta may be wooing the same candidates for on-staff positions offering benefits.
The gig and work-at-home revolutions have both spawned and generated huge growth for a panoply of service providers in a dozen areas that mostly didn’t exist a few years ago. The roster includes collaboration software providers Slack, Zoom, and Fuze, tech-enabled delivery platforms Roadie and Doordash, and talent-matching sites such Thumbtack and Upwork.
But Atkin and the team see big openings for new players. Work times for gig jobs are constantly changing, so software that sets schedules and keeps workers up-to-date via their smartphones is a promising area. Another is technology that makes home offices as user-friendly and efficient as the most tech-enabled worksite office. Recruiting sites that give companies the tools to search nationwide for the best candidates are a potential winner. Such sites could also provide the job-seekers with the broadest possible audience, including software for staging “face-to-face” interviews on the web.
Although the gig economy offers workers freedom and flexibility, they also face special problems, notably a lack of benefits and a feeling of isolation. “They’ve gained liberation in how they work, where they work and when they work, but they’ve lost a lot of the other advantages of full-time employment, such as training, sociability and benefits such as parental leave and health coverage,” says Douglas Atkin, an adviser to Z-Work who served as global head of community at Airbnb during its hyper-growth years. (Yes, Z-Work employs the services of two Douglas Atkins, a duo referred to internally as “Doug Squared.” We’ll refer to Atkin the adviser as “Douglas.”)
Douglas also notes that at-home workers don’t share the same sense of community as folks who sit side by side in offices and chat in the cafeteria. “Sure, workers are highly productive on Zoom calls, but they’re feeling, ‘We miss each other.’ So companies can improve morale by organizing pub crawls or hikes, and hosting offsite events,” says Douglas. “We had loads of events at Airbnb, held in places as diverse as a palace in and breweries in Brooklyn. We’d serve lunches, answer questions, and most of all the hosts got to meet and help each other.” Douglas spoke at Airbnb Open extravaganzas for thousands of hosts, held in such venues as Paris and San Francisco.
Another opportunity that Douglas rates among the most promising: Companies often employ thousands of part timers who buy health insurance on their own. A purchasing platform could leverage their huge buying power to secure more choices and better deals.
A team of operators
Of course, because of the way SPACs are structured, the Z-Work founders are seeking just one high-flyer from a broad roster of contenders, mostly backed by venture capital firms. The team boasts an unusually strong and diverse collection of resumes. It also has a much more pointed mission than most SPACs, which tend to search more broadly and are often run by dealmakers, not operators. Atkin is the former CEO of Instinet, the groundbreaking Electronic Communications Network (ECN) that pioneered off-exchange stock trading over the web. Atkin is also the co-founder, along with Tom Glocer, former CEO of Reuters, and Duncan Niederauer, who headed the NYSE, of Communitas Capital, a venture fund that invests in FOW companies. Its investments in include Graphite, Premise Data, and Comply Advantage.
Co-chair Terrill is a Match.com veteran who served as CEO of HomeAdvisor for seven years, forging ANGI Homeservices via the 2017 acquisition of Angie’s List. In that period, Terrill lifted the company’s sales from $175 million to $1.28 billion. Z-Work’s president is Adam Roston, who orchestrated IAC’s entry into the FOW frontier through acquisitions of NurseFly and Bluecrew, and served as a director of corporate development doing tens of billions in M&A deals at Microsoft.
Isn’t Z-Work entering a market that’s already overloaded with SPACs battling for the best candidates? The team reckons that it holds an edge because its offering is so distinctive. “The headline says that the field is ‘crowded with SPACs’ and that entrepreneurs are just saying, ‘Bring me a SPAC,’” says Terrill. He notes, however, that most SPACs are less appealing because their mission is so expansive. “Some will say, ‘We’ll go after fintech, or EVs, or real estate,’” he says. “They missions are vague, they have a lack of focus. The other day, a SPAC going after real estate bought an EV company.”
In contrast, Z-Work casts itself as a specialist in the new world of work. “By focusing on companies in that space, you appeal more to entrepreneurs than the SPACs that just offer money,” says Terrill. The expertise provided by Z-Work’s founders is highly appealing to entrepreneurs. The team is the antithesis of the financial engineers so common among SPAC sponsors. “They view the process as a transaction, a way to make money taking a company public,” he Terrill. Teams with deep operating experience are still far from plentiful, but their numbers have grown in the last couple of years, he adds. “High quality companies really like it when you bring operating talent,” he says. “It’s not typical that you put together a group with our breadth of experience.”
The Z-Work team harbors plenty of experience with conventional IPOs. And those encounters convinced them that SPACs are a much better way to take companies public. Atkin shepherded Instinet through its IPO in the spring of 2001, and Terrill guided ANGI Homeservices through the gauntlet in late 2017. For Fortune, they gave a detailed account of how their SPAC works, and why it’s so far superior to putting Wall Street in charge.
A different kind of funding flow
Before its shares started trading on January 28, Z-Work collaborated with Jefferies & Co. to raise the $230 million, principally from asset managers and hedge funds. Retail investors purchased a small part of the offering. A group of seven founders, board members, and advisors contributed $6 million, with most of the cash coming from Atkin, Terrill, and Roston. Those insiders received an outsized, 20% piece of the equity to split among themselves. Explains Atkin: “The reason is that we’re paying the SPAC’s expenses until we find a merger partner, and we’re taking the risk, because if we don’t find one in 24 months, we sacrifice the $6 million.” The founders are also restricted from selling any shares until at least a year after Z-Work makes an acquisition, or until its stock rises 20% above the offering price.
The $230 million is earmarked to help grow the young comer that Z-Work “purchases” and folds into the SPAC. Z-Work negotiates with the entrepreneurs and VC investors to establish a fair price. Say they agree on $1 billion. Z-Work’s $230 million contribution would give its shareholders an interest of around 23%. The SPAC is then dissolved, and the player it just acquired will go public on the NASDAQ. SPACs can also raise a lot more money just before the merger if it’s needed to fund expansion, say, of an acquisition a lot bigger than $1 billion.
Atkin and Terrill much prefer SPACs over IPOs for two reasons. First, SPACs generally do not result in a giant price “pop” on the first day of trading that diminishes the cash going into the issuing company’s treasury. Second, retail investors get the same crack at buying shares, at the around the same prices as the big banks, funds and everybody else.
That preference reflects their own sobering encounters. Atkin relates that when Instinet went public, the investment banks wanted to price the shares in the underwriting, reserved mostly for their asset management clients, at $12. “I saw there was demand for a lot more shares than we were selling, so I asked the bankers to lift the price to put more money in our coffers. They reluctantly agreed to $14.50.” His tough stance helped, but still didn’t prevent the bankers from underpricing Instinet’s shares. On the first day of trading, Instinet closed at $19.50, handing a 35% gain to the money managers who got the shares for a bargain. Their gain was Instinet’s loss. If the company had received the full $19.50, Instinet would have raised $624 million. Instead, it collected $464 million in cash, leaving $169 million on the table.
“Conventional IPOs really benefit two constituencies,” says Atkin. “That’s the investment banks, and their big trading clients. The banks convince the company that the IPO is great if the stock bounces 100% the first day, leaving tons of money on the table.” He adds that retail investors are locked out until the stock starts trading, in this case, generally at much higher prices than hedge and mutual fund clients paid. “Then the price often goes down,” he says. The losers are the company and the everyday investor. “In the Instinet deal, the bankers told me, ‘It was a great IPO.’ But they didn’t finish the sentence. Sure, it was great for the banks and the clients that win the lottery by getting handed free money. But it wasn’t a good deal for Instinet and it was unfair to retail investors.”
SPACs avoid those pitfalls, says Atkin. The SPAC lifecycle actually involves going public not once, but twice. The whole SPAC process is designed to avoid “pops” and ensure that a maximum portion of the cash raised goes towards building the young enterprise it acquires. All SPACs price their shares at $10 at their debut. Z-Work raised $230 million by selling 23 million shares at $10. Its only asset is that $230 million war chest. A money manager that owns 10% of Z-Work effectively owns 10% not of an operating company, but shell holding cash.
It’s logical, then, that the shares didn’t move much when Z-Work went public and started trading. It did get a slight bump, rising 4% to $10.40 by the close of trading on its opening day. But that’s a trifle compare to most IPOs, and tiny first-day moves are a hallmark of SPACs. Retail investors were able to buy Z-Work shares on the first day at prices extremely close to what the hedge funds and asset managers paid.
In the second leg, the SPAC team will arrive at a price for its merger partner in talks with the VCs and entrepreneurs. Though the SPAC founders could push for a lower price, the other side pushes back. So the arms-length negotiation results in something close to a fair value. Once the shares of the combined entity start trading, all investors have an equal crack at the shares. “To me, it’s the SPACs are investor friendly way to go public.” Atkin is harnessing the vehicle that’s revolutionizing how tech goes public to hasten the transformation in how America works.