Clio’s $400M Journey to Market Leadership with Jack Newton

Listen to my conversation with Jack Newton, the co-founder and CEO of Clio, to explore the multi-faceted aspects of leading a legal tech company.

Explore the Transcripts for Essential Insights from This Episode

Mark MacLeod:
In this episode, I sit down with Jack Newton, co-founder and CEO of Clio. I first met Jack back in 2008 and lost an opportunity to invest in his company because I didn’t think lawyers would trust having their documents in the public cloud. Jack now runs a 1,100-person market leader in his category, and he’s preparing for an IPO as his next milestone. So I clearly got that one wrong.

We unpacked his whole 16-year journey, going from venture capital to private equity backing, preparing for an IPO, and many other topics. I hope you enjoy this discussion as much as I did.

Jack, welcome to the startup CEO show. It’s a true pleasure to have you. How are you doing today?

Jack Newton:
I’m great and thanks for having me, Mark.

Mark MacLeod:
Real pleasure. We were just chatting a little bit before going on air and hadn’t seen each other since 2019, and the world has changed a ton since then. And actually, you and I go way, way back. I feel like maybe it was an intro from Christoph Jans and like 2008 or something, you know, not that you were pitching me, I think maybe it was an advice thing or whatever. But by the way, that’s very often how funding begins, right? If you want advice, ask for money. And if you want money, ask for advice. And I remember my biggest concern was, would lawyers trust having their documents in the public cloud?

Jack Newton:
Well, I think it was the right question to ask, though, you know, back in 2008. Also, you’re right, Christoph did introduce us. You offered some great advice on navigating the fundraising journey, and some of your listeners are probably too young to recall, but 2008, and 2009 were not the best times to be raising money in the middle of the global financial crisis that I think makes the turmoil today look like a pretty easy journey by comparison.

But yeah, we orbited around that as probably the highest-risk aspect of Clio from an investment perspective. What did you need to believe that Clio would be successful in the future? And you had to believe that lawyers would eventually trust the cloud and trust the idea that they could store their confidential client documents in the cloud. And that was something I think myself and my co-founder Rian and I believed in our bones that that was the direction the world was going and that the legal world could be guided in that direction as well. And I think with the benefit of now 16 years of hindsight, that seems obvious.

Mark MacLeod:
It was a big bet at the time. It was a big assumption.

Yeah, well, I’m always curious, you know, you weren’t a lawyer. Like, it wasn’t like, oh, I’m sick of how I run my practice. Like, what was the origin story of Clio?

Jack Newton:
Yeah, the origin story was we have to rewind back to when I was eight years old and I met Rian Gauvreau, my co-founder, back in grade three in Edmonton, Alberta, at Rio Terrace Elementary School. And we became fast friends. Always wanted to do something together post-graduation, but we weren’t sure exactly what that looked like. I went off to do computer science at the University of Alberta and eventually got my master’s degree specializing in machine learning, actually using neural networks to build recommender systems.

So it’s very interesting how now 20 years later, some of that’s come full circle and it’s starting to impact my professional life at Clio with LLMS in the age of AI, which we can, we could talk more about later, but I did spend some time doing my master’s degree in machine learning.

Meanwhile, Rian went off and moved to Vancouver, BC to do his undergrad and eventually his MBA at UBC. And what was the trajectory for me after getting my master’s degree was joining a University of Alberta spin-off company called Konomics that was doing medical diagnostic software.

And I got the opportunity to be exposed to the fundraising journey, I got exposed to what it’s like to be building a brand new product in a brand new category and I kind of caught the startup bug. I came to appreciate how exciting it could be to build a company which to a prairie boy in Edmonton, coming out of a computer science degree, especially in that mid-2000s era, I graduated, that was not a common path. Success was going to work for IBM or Microsoft. Those were the companies that were hiring up entire graduating classes.

And I remember an inspiring book for me at the time was reading “Hackers and Painters” by Paul Graham, and it just talked about this idea that like, hey, why go work for someone else when you can go build your own thing? I found that truly inspiring and Rian and I started batting around ideas for what building our own company could look like because I enjoyed eventually becoming the number two person at Konomics over time and being the director of product development. But I started to feel like I wanted to lean into building my own thing. This was around the 2006, 2007 timeframe. And what was obvious to me was the cloud was going to transform every industry. And again, this is rewinding the clock a little bit, but just to set the context.

At this point, Salesforce was just four or five years into its growth journey. There are a few companies, like 37signals that were building web applications like Basecamp, but we were still very, very early in the cloud journey. But what was obvious to me as a technologist was that that was the future. This is very reminiscent, I think, of how AI feels to people today. You could just see this is going to change everything.

And I reached out to Rian and said, hey, I think this cloud thing is going to be big. And Rian and I rapidly became what I describe as two hammers looking for a nail, where we had a conviction that the cloud was the solution and we were looking for the problem to apply the solution to. Looking for the nail that could be the solution we implemented. And, at the time, Rian was working at Gowlings as their IT manager. Gowlings, for your listeners who aren’t familiar with them, are one of the biggest law firms in Canada.

And Rian’s observation was, you know, I can tell you lawyers don’t have great technology at their disposal. They don’t make good use of the technology they have. And maybe the cloud would be a great distribution model to look at for lawyers. So we very quickly honed in on legal as we started to understand that the core problem we were trying to solve was helping lawyers with project management.

Even though lawyers call this legal practice management as a category, at the end of the day, it’s project management, timekeeping, and billing. And we went to work building that platform, what we now call the operating system for legal. That’s the origin story for Clio on how two legal outsiders built what eventually became the largest legal practice management platform in the world.

Mark MacLeod:
It’s amazing. You know, I’ve mentioned this on the podcast before, but Y Combinator released a study where they looked at different predictors of startup success. And the number one predictor by far was how long the co-founders knew each other. And so by that dimension, I think it’s hard to beat grade 3 in terms of tenure. So that’s pretty impressive now.

So you were the technologist, and Rian was the business guy. How did you end up as CEO?

Jack Newton:
Yeah, it was an early conversation that Rian and I had, and we punted on that decision for as long as we could until investors started asking, who’s the CEO? Because we initially just rolled up our sleeves, and even though Rian had a bit more of a business background, he was also a hacker. He enjoyed coding and building. So he and I both built the first versions of Clio side by side, collaborating on building out the code base.

And what Rian felt was like, hey, I’m fine being the person in the background, helping do the hiring, helping coordinate the background activities that were happening at the company, helping build the culture as the company was scaling. And we both felt that if, you know, there’s a frontman that’s better at dealing with investors and so on that was a better fit for my skill set. And early on, you know, I think it’s probably a year into building the product, designated myself as CEO and Rian as COO.

Mark MacLeod:
Honestly, I think it makes sense. First of all, the results speak for themselves. I’ve never met Rian, so it’s not a criticism of Rian. But like I often say, accountants don’t start law firms. You have to be a lawyer to start a law firm. And there are exceptions to this, but I think technology companies should be run by people who at the very least have product chops, if not actual technology chops. So that makes sense.

Jack Newton:
Yeah, I was very deep on product, and thanks to my experience at Konomic, I had quite a bit of experience working with investors, having gone through an accelerator, and did an early version of some of the accelerators that bridged BC, Alberta, and Silicon Valley. So, you know, just that that range of experience put me in a pretty good position to quarterback some of those initial investor conversations and so on.

So I think that’s one of the harder decisions that early-founding teams need to make. And there are probably a lot of companies that don’t get off the ground because of that being maybe the first disagreement between founders. And I think if there’s something I can give Rian a lot of credit for, is that he’s always been very ego-free in his approach to building the company alongside me and is happy to act more in the background than on the center stage.

Mark MacLeod:
I love that. And I’ll say, for what it’s worth, it’s not like I run into you all the time, but I don’t think you’ve changed. You have the same humility that you had at the beginning, even though you’ve been wildly successful. And so I think that’s a huge part of your success. If you think your shit doesn’t stink, you’re not open to input and feedback, and you’re not learning. And of course, learning is the only way you can keep up. You get a paycheck from the same entity, and the same bank account, but it’s not the same company. And you’re not the same leader.

Jack Newton:
Yeah, I think if there’s a death knell for anyone, and that probably applies in your personal life as much as your business life, but if you ever feel like you’ve got it all figured out and you don’t need someone else’s perspective to get better, or that there’s not an opportunity for you to get better at your job, you’re dead in the water.

And so I’ve looked at this as the learning experience of a lifetime. Especially having been at this for 16 years now, a question I get occasionally is, you know, “Hey, you’ve been at this for over 16 years now. How do you stay engaged? Is it still exciting? Is it still fun?” And I answered that question by saying, I’ve got a new job every quarter. It’s so dramatically different today than it was in 2008.

And I appreciate your comment and what I’ll take as a compliment around humility because back in 2008 I was very clear that I had no idea what I was doing. And just like a lot of founders, and CEOs, I figured it out day by day, but looking at that as a learning opportunity, looking even at your failures as a learning opportunity, I think is crucial. And what I’ve felt is I’ve gone through one of the most exciting learning experiences I think anybody could hope for over the last 16 years.

And now running a company that has over 1,100 people and is on track to an IPO well on its way to transforming an industry that we care about at a profound level. It’s humbling, but I still wake up very excited every morning to run it that lies ahead of me.

Mark MacLeod:
I love it so much. You know, while we’re on this, like you said, you have a different job every three months. Other than just kind of hanging on for dear life and kind of surfing the growth, what have you done to make sure that you’re always growing faster than the business? What methods have you employed to stay ahead of the business?

Jack Newton:
I found one of the most useful things to do is find ways to surround myself with people who have been through the next stage of the journey. And if they can just help you see around a corner and help, I like to use the phrase avoid accumulating scar tissue, you know, because they’ve already got the scar tissue accumulated, that can be just so powerful. And there are a few ways to achieve that.

You know, when you’re hiring people, especially in your senior team, if you can hire somebody that’s been through the next stage of the scaling journey, if they’ve seen what scaling from 200 million ARR to 500 million ARR looks like, if they’ve seen what scaling from 1,000 to 2,000 people looks like, that’s enormously powerful. And as Samuel Clemens said, history doesn’t repeat itself, but it does rhyme. And I think when you look at the scaling journey from company to company, you don’t see history repeat itself exactly.

And I don’t think you want leaders who are deploying the same playbook they had at a previous company. But there are modifications of that playbook and learnings from that journey that will apply very directly to your company. And again, I’m very self-aware of the fact that every single day Clio is the biggest company I’ve ever run. You know, if I’m not going to make potentially fatal mistakes in that leadership journey, surrounding myself with at least a subset of my leadership team, I want to make sure I’ve seen that next stage of the journey. And I’ve got a mix of folks that are also doing the biggest job they’ve ever done as well. So it doesn’t need to be 100% of your team, but I think you want to layer in some of that.

The other resource I’ve found to be enormously helpful is portfolio companies in my investors that have been at the next stage of growth. And it’s interesting talking to investors. And you used to be in this world, Mark, you know this as well as I do. They’re all so desperate to figure out what our value-add is beyond money. How can we convince Jack to take our money over the lineup of investors that’s behind us, when again, money is kind of the definitionally fungible commodity that is not differentiated in and of itself?

And when they’re asking how can we differentiate ourselves, really the most important question for me is who do you have in your portfolio that looks like what Clio will be in two or three years? What CEOs, what founders do you have in your network, and what operating advisors do you have in your firm that have seen some flavor of our journey? It doesn’t need to be a vertical SaaS company that is scaling from 200 million to a billion of ARR, but is it a payments company that has seen some flavor of the payments journey we’re going through? Is it maybe a horizontal SaaS company that rebuilt its GTM motion to be vastly more efficient? Is it somebody who got some useful insights on how they priced and packaged AI in their application?

And those are the types of conversations where when you join an investor network, when you have sister portfolio companies, they’re almost definitionally non-competitive with you, right? Because of the investment mandate that the investor needs to pursue, everyone feels compelled to spend time with and share learnings with other members of that portfolio. And that’s probably what’s been for me, one of the biggest unanticipated benefits of picking the right investors.

Getting plugged into that peer portfolio company network. And again, having folks that have seen some flavor of the next stage of the journey, and by the way, also being able to pay it forward and talking to companies and sharing with companies that are maybe a few steps behind you in that growth journey, but that’s a great mutually reinforcing learning network that can help you maintain a real advantage as you scale.

Mark MacLeod:
I love that. And so that reality that you’ve described may be completely foreign to the early-stage listeners here, right? Because in the early stages, you’re trying to convince an investor to take a leap of faith that the power dynamics are completely in favor of the investor, but in the growth stage it’s the reverse because by definition you’re just making sausages, you just figured it out. It’s not 100% de-risked, but it’s largely de-risked, and so growth investors are just trying to figure out, how on earth do I get a ride on this rocket ship? And as you said, money is money. It has to come down to value-add beyond that.

Jack Newton:
I’ve got huge, huge sympathy for that plight. And I was giving a talk about the early days of Clio the other day, Mark, and told the audience that was making a similar observation, and I shared the fact that the first million dollars you raise is the hardest million dollars you have to raise by a mile. I remember scrimping and clawing at every funding resource, from my parents to a maxed-out credit card to a second mortgage on our house to get Clio funded in that 2008 period.

I can tell the story if we have time, but it was a cold email from Christophe Jans that ended up being the source of that first external kind of institutional angel funding. But that first million dollars is so, so hard, but once you get a little bit of traction, and we’ve now raised over $400 million of capital at Clio, the other $399 million was a cakewalk by comparison. But that first million is so hard.

As soon as you get the traction and start to demonstrate that you’re putting fuel on a fire that’s burning versus trying to figure out whether you can get the match to take or not, it’s a different ballgame.

Mark MacLeod:
I completely resonate with that. I got to hand it to Christoph. He was just hustling. He reached out to me. He figured out, oh, Mark’s someone I should talk to in Canada. This is how he got into Zendesk. He didn’t wait for things to come in, he just went out.

Jack Newton:
Yeah, Christoph is easily one of the most value-add people I’ve had on my journey at Clio. And to your point, around the early days, and even, even to my earlier point, Christoph’s first two investments were in Zendesk when it was like four guys in a coffee shop in Copenhagen that he wrote that check.

And this cold email I’m describing, you know, I’ll just tell the story quickly. Rian and I were pounding the pavement all over western Canada and the western U.S., going to every angel pitch forum we could find and telling the Clio story. And what we found so frustrating and demoralizing was we would get the feedback that this was one of the best startup pitches they’d ever seen, it looked like a great idea, and they loved the business plan, but they were just not writing checks right now because again, people were worried that the financial system, as we knew it, was going to collapse.

And then out of the blue, our info@clio.com email address got this cold inbound email from Christophe Jans saying, this looks like a really interesting product. I’ve recently become an angel investor. I just sold my company Flakes to, I think it was the MySpace group at that time. I just made my first investment in a company called Zendesk, and I’d love to talk to you about investing in Clio, sincerely, Christoph Jans. And I think for a few reasons, our Google apps at the time promptly put that in the spam folder.

Mark MacLeod:
Thank god you found that.

Jack Newton:
And then it sat in there for two weeks, and then Christoph sent a follow-up email saying, hey, I just wanted to reiterate my interest in potentially investing in Clio. Would love to jump on a call. So what had happened because of Google spam filters was we inadvertently slow-played Christoph and probably built up his excitement even more by not responding. And he sent this follow-up email, which also went straight to spam.

And I’m not a religious guy, but in what I can only describe as an act of God, Rian one day decided, I’m bored, I’m going to check and see what’s in the spam folder. I wonder how good the spam filter is. Goes in there, sees these two emails from Christoph, forwards them to me, and says, this looks legit, should we reach out? I say, it does look legit. Reach out to Christoph, jump on a call with him, we instantly connect, and go through this whirlwind due diligence process.

I remember me and Rian flew out to Berlin to meet with Christophe. He said he wanted to meet in person. My wife at the time was eight months pregnant. So we did like a 24-hour trip to Berlin and got back on a plane later the same day to make sure I hopefully didn’t miss the birth of my first child on that trip. And sure enough, Christoph ended up leading that first investment round in Clio.

And by the way, just to my earlier point about portfolio, this was a very early instance of this. Zendesk was two or three years ahead of us on the growth curve. And I remember talking to Mikkel Stain and others at Zendesk and it was just enormously valuable because back in those days we were sharing through oral tradition almost what SaaS metrics were and how to think about financing a SaaS business.

And just all these ideas were before Jason Lemkin or David Scott or any of those guys blogging about this stuff. It was like this whole idea of LTV to CAC ratios or CAC payback periods and this new way of thinking about how to finance a business and talk about the efficiency of your sales and marketing machine was all new, and that was just enormously valuable.

But I’ll tell you, the learning is not “Check your spam folder”. That might be a learning, but the learning for me was there was a good friend of mine in Edmonton named Reg Charami who at the time was running a blog called “Web 2.0 central.com”, and he asked me like, hey Jack, can I write an article about Clio on this blog? And I was like, sure, it can’t hurt.

And it was like I had to do an interview and stuff. And I remember wondering whether it’s going to be worth the time, but deciding, hey, at worst it’s going to be some inbound links to clio.com and some good, some good Google juice. And sure enough, Christoph found out about Clio reading that blog because like you said, he was a hustler.

What he was smart enough to realize was by the time you read about something on Techcrunch, it was too late. So he was reading about all this stuff on who gets covered on which blogs before they hit TechCrunch, and Web 2.0 Central was one of those blogs.

So, just investing that time in kind of a low-effort and probably low-payoff investment ended up being one of the most important moments in the Clio journey that you just didn’t see at the time. Because otherwise, Christoph would have never found Clio. We would have never found Christoph. And I’m not sure without Christoph’s support if Clio would have gotten through that tough 2008, 2009 period. So it’s interesting how nonlinear that journey is sometimes, especially in the early days.

Mark MacLeod:
Such a great story. I’m really glad you shared that. I love what you said about oral tradition. Now VCs are blogging all the time and writing about everything. But that wasn’t happening then. I remember when Toby from Shopify first reached out to me. He was reading my startup CFO blog, and I was like the only guy in Canada talking about SaaS finance in like 2009. It was like black art, and I was just writing to clarify my thinking. I was learning and just sharing as I learned, you know, it’s just all so new then. So, yeah, so funny.

So you were new, obviously, to cloud and specifically to lawyers being comfortable with cloud. You also, while I’m sure there were many examples of this, vertical SaaS is now a thing, but it wasn’t then. There are investors who go deep on vertical SaaS, and I’m just curious, for anyone listening who’s running a vertical SaaS business, how do you digest your success into a playbook? How would you reverse engineer your success as a blueprint for folks running vertical SaaS companies?

Jack Newton:
Yeah, I think it’s interesting. I would say that for the first five-plus years that we were building Clio, the idea we were vertical SaaS was almost used in the pejorative sense. You know, like, almost like saying niche SaaS, right? Like, this is a niche market that is definitionally limited in its opportunities. And I remember again, over the course of dozens of pitches to investors being able to see them tune out two or three minutes into the pitch, pick up their Blackberries or their iPhones, and just tune out as soon as they realized the TAM was, in their minds, limited.

What I started to see five years into the 2013 time period is there started to be some investors that had an explicit thesis that vertical SaaS was going to be big. And Bessemer Venture Partners was one of those investors that ended up leading our Series C in 2014. They almost led our series B in 2012, but missed out on it. They had a very explicit thesis on vertical SaaS that I think has turned out to be very prescient.

And what they identified was essentially what vertical SaaS lets you do is get closer to your customer’s pain points and go deeper in solving those customer’s pain points than any horizontal solution could ever hope to do. And by virtue of being able to go deep into solving those pain points, you can build an average revenue per user that scales dramatically over time as you go deeper into solving more complex and more meaningful problems for those customers.

If you look at the Clio story, we’ve been able to, for example, grow our product suite and grow our pricing from something that was $49 a month when we launched to something we see a very clear trajectory to having $400 per user per month economics as we start to drive these very powerful value-add features and products to our customers. And I’m a big believer in the idea that whoever can get closest to the customer wins because it lets you both listen very closely to what they’re asking for, and it lets you invent on their behalf in a really powerful way because you understand both what is possible with technology and what their specific set of problems and challenges are.

So, I think that’s a remarkable opportunity that in the age of AI now as well, I think is even accentuating that opportunity for vertical players because AI, I think has a number of really interesting horizontal applications. But when you start to tie in the vertical opportunity and the ecosystem of data that somebody like Clio has at its disposal to deliver AI value-add, whether it’s generative AI or summarization or recommendations, given the context we’ve got on the whole business and the whole workflow that the customers are executing against, that is an incredible opportunity.

The other thing that I think Bessemer had right back in 2014 that is still very true a decade later, is the winner takes most dynamic that you see in a lot of horizontal SaaS markets is amplified significantly in vertical markets where there’s a dramatic winner takes most dynamic. And I would say even further in the legal market Clio is playing in, we’re the very clear market leader, and a lot of lawyers when they’re going through the decision-making process of what products they should choose, will often just look to the simple majority of what their peers are using.

Mark MacLeod:
It’s that old adage, right? You never get fired for buying IBM. They used to say that back in the day.

Jack Newton:
Exactly. And it’s a flavor of that where there’s a very powerful flywheel. What I think is the most important thing for anyone playing in a vertical market to focus on, and this holds for any market as well, but it’s amplified in vertical markets, is focus on delighting your customers. Focus on having the absolute best product.

If you can get those NPs into a 50, 60, 70 plus range, the word of mouth and the compounding effect that will have on your growth will just have such a dramatically positive effect on your customer acquisition economics that at some point you could take your foot entirely off the gas on the paid spend front and just watch that flywheel continue for years because you’ve built up so much goodwill and so much word of mouth in a pretty concentrated customer base. And that’s just very hard to do in any horizontal market.

You don’t see that kind of dynamic and you don’t see people typically recommending horizontal applications to each other all that often. But in vertical applications, there’s a very strong word of mouth and a very strong ability to drive down customer acquisition costs over time by building a truly great product.

Mark MacLeod:
I love that. A lot of VCs talk about backing mission-critical apps. And so clearly you are that, right? Your clients run their business on Clio, which I assume manifests in very low churn.

Jack Newton:
Oh, yeah, we have incredibly low churn rates. And even though we service a large number of solo small firm lawyers in our customer base, we’re moving upmarket and seeing a lot of success in the upmarket. But even in our solo small firm market, we see gross retention in the high nineties. And I attribute that number one to a great product, number two, lawyers have a much lower natural attrition rate than most small businesses. You spend years getting your law degree, you often spend six figures getting your law degree, so you don’t just throw that out when you have a bad day. It happens once in a while, but not all that often.

Mark MacLeod:
Also, you know, as a former VC, one criteria I would often analyze was, is the market rich? Can they pay for this product? And, you know, if you were serving, I don’t know, barbers. I know there are perfectly good businesses that do scheduling for barbers, but your target market is on the richer end. That $400 per seat that you’ve gotten up to is less than an hour of a billable rate for a lawyer.

Jack Newton:
Exactly. And by the way, our customers tell us Clio saves them 8 hours per week of time. So that ROI proposition is just so dramatic. You get your ROI positive within your first hour of time saved with Clio, and we save you 32 times that over the course of a month.

Mark MacLeod:
You’re obviously not charging enough, but I love it.

Jack Newton:
No, but that’s also been a very deliberate strategy where we’ve been very focused on capturing what we feel is a massive greenfield opportunity out there. And the approach has been, let’s charge enough that we can make a living at this and invest in the product and continue being the leaders in innovation. But if we’re leaving money on the table, that’s okay. Let’s focus on really building the market presence, bringing the market along to the cloud, allowing lawyers to have a transformative effect on their clients thanks to the technology they’re leveraging, and we can worry about economics in the long term.

Mark MacLeod:
One of the criticisms of venture is that as soon as I raise that capital, I need to build towards an exit. Investors want to exit in five to seven years. You’re 16 years in, but unlike the vast majority of companies, you reset the clock by getting new investors and you move from venture to private equity backing. And I think lots of folks listening understand venture, that private equity is probably a bit more opaque, but going from one to the other is completely unknown. Could you just tell us about how you made that transition?

Jack Newton:
Yeah, I’m glad you’re asking the question, Mark, because I feel like this is one of the least discussed aspects of the startup journey. And when you’re raising that first round of capital and getting those first five or seven years funded is amazing, but it’s by no means the finish line. And if anything, it’s just the start, because what you have committed to, as you pointed out, is an exit of some kind.

And, realizing that your investors are not so much in the business of buying shares, but they’re in the business of selling shares and then returning those returns to their LPs is the business model. No one is giving you money through an investment to hold onto forever.

And the minute you start getting misaligned with your investors on that time horizon and what the exit plan is, it can cause a lot of distraction, a lot of angst. To your earlier comment around founder misalignment being the number one cause of death for startups, somewhere in the top three, I’m sure, is not figuring out how to transition from one investor base to another as you go through that five to seven-year threshold of being a company, who’s the next stage of investors? And what’s changed dramatically over the last 20 years is companies used to get around VC funding and go public, and that was how you created liquidity for your investors.

Over the time I’ve been building Clio, the baseline for what a public SaaS company could be from a revenue perspective went from $100 million of ARR maybe ten years ago to $200 million of ARR five years ago to now you need to be in the four to $500 million of ARR to think about going public today. And there is, I think, just the cost of being public is so high, and the risk of being kind of orphaned if you’re not allowing investors to deploy enough capital into you is, I think the reason you need that larger valuation to make sense. But that bar has kept rising.

And just to set some context, Apple went public doing $25 million of revenue back in, I think it was the late seventies, they went public. So things have changed dramatically and that exit and liquidity time Horizon has gotten so long that many companies are still private ten or 15 years into their growth journey. So you need to think very deliberately about how to trade off your cap table over time.

And there’s going to be a significant misalignment between you and your investors in terms of incentives in that journey that if you’re not, frankly, a little bit bullheaded as a founder in terms of how you want to see things go, you’ll end up in a situation where you end up selling your company as the most likely before you want to sell it.

Because what your investors will want to see is that majority premium that you see if you’re selling a majority of the business, they’ll want to try to maximize the amount of shares they’re liquidating, and the easiest way to do that is to sell the business. And if you’re not aligned to that as a founder, and you may be maybe at ten years, you’re thinking, I’m ready to punch out and I want liquidity that’s great. Go sell the company, run a banked process, and figure out what that next stage looks like.

But if you’re like me, and I very much think about Clio as a hundred-year building journey, I want to build a generational, enduring company that outlasts me as CEO and outlasts even the entire cohort of ‘Clions’ that are working at the company today and can have this profound impact on the legal industry over the course of decades to come, you need to build your cap table to support that kind of journey.

So what we did is we, back in our Series D, we brought on TCV and JMI as investors that essentially created liquidity. This was a $250 million investment round. The majority of that $250 million was secondary liquidity for both employees and long-term shareholders. And what I was able to tell all the investors on the cap table back in 2019, and I remember having a discussion with this transaction with you back then as well, Mark, but the message I gave to all investors was, look, we’re going to hunker down for the next five years and try to take this company public.

That’s not the finish line, but one of the milestones we’re rowing towards. Now is your opportunity to get on the bus or off the bus for that five-year journey. If you want liquidity in the next five years, I want you to punch out and get off the bus. If you’re comfortable with the next five years being the growth journey, stay on the bus, and roll all of your equity forward, but I also don’t want to hear a peep about liquidity for the next five years was also the best.

Mark MacLeod:
That’s totally fair. I love it.

Jack Newton:
I said, I’ll go out and raise as much capital as I need to to create as much liquidity as there’s demand for in our base. That ended up being about $250 million of a mix of primary and secondary, but the majority of that was secondary. And I was able to reset the clock with TCV and JMI coming in. I would describe TCV, which is an acronym for Technology Crossover investors.

Mark MacLeod:
That’s almost like in between venture and PE. It’s a nice transition, right?

Jack Newton:
Exactly. They’re right in the middle of that spectrum. So what I would also encourage anyone listening to think about as they’re thinking about navigating this chapter is who you want on the spectrum of a VC mindset to a private equity mindset. And what I would say when it comes to private equity is there are two very distinct categories of private equity. There’s private equity that is very founder-friendly and very much wants to back a founder-run business and be pretty hands-off.

They’re going to probably want a board seat. They’re going to want good visibility in the business and they’re going to try to be value-add, but they’re not going to try to grab the steering wheel. And then there’s private equity that is on a variety of spectrums, but in some way trying to gain control of the business, maybe even to the extent of saying whether they’re explicit about it or not, you’re not going to be the CEO of this company after we invest in it.

Mark MacLeod:
What comes to mind is they give you a Bible. The day they close, here’s how you’re going to run your company going forward.

Jack Newton:
Exactly. The playbook. And then here’s the tools, here’s the tech stack, here’s all of that. And look, I mean, for some founders, for some CEOs, that might be great. That might be exactly what they’re looking for. So this looks different for every person, but it’s a very different world than the early stage where you’re raising purely from VCs that almost uniformly are pretty hands-off. They’re going to show up at your quarterly board meeting, and they’re going to check in, but it’s a pretty hands-off relationship compared to this next stage of growth. But being very strategic about what that recap looks like at that, call it the seven-year mark is, I think, where you need to start thinking about that.

Also be very clear, when you’re taking an investment, what vintage fund are you investing from? How old is the fund that you’re investing out of? Because it’s not just the seven-year timer is not independent of fund age. The seven-year timer is a function of when they raised that fund.

So if somebody is investing into a fund that’s been around for five years, for example, they’re going to start having that liquidity crunch in two or three or four years depending on the return profile. There’s a huge crunch right now on funds to create returns for their investors because there are so many investments that are underwater, so many funds that aren’t able to return capital to their investors. And that dynamic comes into play when a fund is typically in that ten-year timeframe.

So being very clear on how old is the fund that you’re investing out of. And in some cases, they have a choice of what fund they can invest out of and you want to make sure your investments are coming out of that. Ideally, that fund has closed sometime in the last year, so you’re maximizing the amount of time you have between that next stage of growth.

And then again, when I brought TCV and JMI on board, it wasn’t just who could offer the maximum valuation so I’m creating a good return for my investors, that was secondary to thinking about who’s the best partner for this next stage of growth. It’s almost like you’re remarrying and deciding who your partner for the next five to ten-year segment of the journey is going to be, and you want to create a good outcome for your exiting shareholders, but you also have even a fiduciary duty to your remaining shareholders as well, of course, to yourself and the rest of the company to pick a great partner that’s going to be the partner that helps you scale for the next five to ten years.

Mark MacLeod:
Yeah, I think you chose well. I have a ton of respect for both firms.

Jack Newton:
I’ve been super happy with TCV and JMI, just as a plug for anyone speaking to them. Very high-quality firms, very thoughtful, super high integrity, no drama.

Mark MacLeod:
As we start to wrap up, 96% of venture-backed companies exit by way of, first of all, shut down. But then, like most to your earlier point, sell versus go public. You set an explicit intention to go public, which I love. Public markets have been up and down. Certainly, all the recent cohorts of Canadian tech IPOs are massively underwater. Does it give you any doubts about your vision for going IPO, or do you still just really believe it’s the right next milestone?

Jack Newton:
Yeah, I think public markets are a pretty intense place to be right now. And I think many of the companies struggling right now, I think made what, with the benefit of hindsight, was a mistake of going out during kind of the gold rush of 2021.

You know, I talked about companies being orphaned because they were subscale. I think you look at a number of these Canadian IPOs in the tech landscape when IPOs were as little as $30 or $40 million of ARR, and while that was sustainable in the Zurp environment and the heyday we saw in 2021, unfortunately, that’s just not a great scale to be public at today.

So I think if you’re going to go public, I think it’s a higher bar for execution that makes you a better company, and I think you need to be very aware of the risks of going public when it comes to activist shareholders, the risks of takeovers and so on. I think that’s where you need to be very deliberate and thoughtful about, for example, a dual-class structure that is enduring, that gives the founder some super-voting control to fend off those activist investors.

I think the activists that took out Jeff had less than 1% of the shares of Twilio and ended up forcing out who I think was a great CEO, a great leader of that company. And that’s what keeps me awake at night when I think about what could go wrong in the public markets. But I do think there are ways you can be very thoughtful and deliberate about designing around that.

But when I think about building an enduring 100-year company that has that kind of longevity, I think one of the best capital markets you can exist in is the public market. And to have both that public capital to drive an M&A strategy to create liquidity for your investors and employees over the long term, to always have your stock as a priced asset that you can leverage in a variety of ways, that’s powerful and I think the governance and behavior that it encourages is a feature of being in the public markets.

There’s an interesting podcast just a week or two ago with Brad Gertzner and Bill Gurley talking about the fact that the number of public companies has shrunk substantially over the last 20 years and the amount of money and the number of companies backed by private equity has ballooned, and I think that’s kind of unfortunate the regulatory landscape has just become so punishing for public companies.

But all that growth and all these great companies that are in the private markets are less accessible to the average MA and PA shop to invest in. And I think that’s kind of a negative long-term consequence dating back to Sarbanes Oxley and all the more recent regulations. It’s $2 to $4 million in fixed costs just to go public today, regardless of your scale. So again, if you’re a $30 million ARR company, that’s a pretty punishing hit on your EBITDA just to be public, and I hope we see some reform on that front.

But it’s a long-winded way of answering your question, Mark, which is why I see Clio as being in a very strong and enviable position in that we’ve got a ton of optionality around how we look at our future capital needs. We are profitable today, we’re growing nicely, and we have over $100 million in the bank. So we’ve got a lot of options and a lot of choices around how we raise money, create liquidity for investors and employees, and there’s a lot of options that you can realize all of those goals while remaining a private company. And if and when the public markets look like the right place for us to be, I very much want to see that as a chapter in the Clio journey, but I do see that as a chapter and more of a green flag than a checkered flag in terms of a moment in our growth journey.

Mark MacLeod:
I have to say, we’ll be looking to watch you ring the bell with a giant smile on my face. Honestly, what a wild ride.

Jack, thank you so much for making the time. There are so many things I could keep talking about, but…

Jack Newton:
Well, maybe we can do a part two someday. Mark, I really enjoyed the conversation as well. It flew by, but thanks for having me.

Mark MacLeod:
Thank you so much.

Hey, thanks for listening to the Startup CEO Show. If you’d like to connect with me, be sure to visit my website at markmacLeod.me, or follow me on LinkedIn at The Mark MacLeod, or X account @markmacleod_, and if you want to tune in again next week, be sure to subscribe on YouTube, Spotify, Apple, or wherever you get your podcasts. We’ll see you next time.