BC Business
It was a tough call to make during The Great Recession
Clio CEO Jack Newton says he’s had more than one bad day at work. But he will never forget the moment in 2008 when he and his co-founder Rian Gauvreau turned away the only investor interested in supporting their Burnaby-based company—in the middle of a global financial crisis. The decision was tough but necessary, Newton stresses, because it helped the legaltech firm become a “1,000-person organization with the most widely used legal practice management system in the world.” Looking back, Newton not only credits Clio’s scrappy start for its current success, he also makes a case for why downturns can be the best time for entrepreneurs to start a business.
—As told to Rushmila Rahman
The cover of The Economist at that time, while we were fundraising, was a picture of all the major logos of the big banks circling a drain. The headline on the cover was, “When will it end?” And I thought: Here’s the moment we chose to raise funding.
It was mid-2008. We’d launched the Clio product; we had some early traction and $100,000 of friend and family money that we’d raised and were quickly running out of.
That day, I got a call from the last angel we were trying to raise money from for our very first financing round. We wouldn’t be able to make payroll if we didn’t get this funding round closed. But he came back to us wanting to modify the previous term sheet he’d submitted in such an aggressive way that we’d be taking on twice as much dilution as the prior term sheet had anticipated, while granting a number of very significant control provisions as part of that investment. We had to make the difficult decision to say no, which was almost worse than hearing no.
Frankly, we’re back in this kind of environment, where investors are significantly modifying the terms under which they’re willing to invest in a startup. If Rian and I had said yes, we’d be setting both Clio and ourselves up for failure.
I took another mortgage out on my house, and we were financing the company through credit cards and every form of debt we could get to. We did not have any room for excess or investments: whether it was driving down to Seattle to get cheaper airfares to U.S. destinations or returning a Mac to the Apple store after a trade show to get a free rental, we were very scrappy in the early days of Clio. We just had such limited resources.
When I think about what some of those challenging times provided the company as an advantage, there’s a level of that same scrappiness existing in Clio today because our initial fundraising round was not done in the kind of environment that we had in 2021, for example, where capital was free-flowing. When you look at companies that raise money in those environments, they often make poor decisions around managing their cash and focusing on the customer. What that experience in 2008 helped me with was focusing our energy on achieving product-market fit… I think the true test of achieving that is when somebody is willing to hand over their credit card in exchange for your product.
That day of saying no to the usurious demands of an investor who knew they had negotiating power—I look at that as a formative day in terms of the culture we’ve got at Clio today. We really try to grow in an efficient way. We’ve never embraced this “grow at all costs” kind of mindset that I think many companies have pursued over the last 5 to 10 years.
You can’t control when you’re raising money, but one of my takeaway learnings from that time is that a recession or a downturn is actually an amazing time to start a company. I think it puts a lot of very positive constraints on your business. Hiring great talent is easier. The cultural norms you set in building a company in a downturn are long-term advantages.
It’s interesting: [venture capitalist and entrepreneur] Chamath Palihapitiya of Social Capital produced a long-term graph showing that many of the transformative generational tech companies that lead in the marketplace today, whether it’s Microsoft or Google or Apple or Adobe, were all created in economic downturns, in tougher economic climates, in high interest rate environments. So there’s reason to believe—and it’s supported by data—that it’s actually a great time to build.
This interview has been edited and condensed.