The rule is that it must be powered, have a keyboard connected, and have an external display plugged in. It is very confusing especially since everything cuts out if your power source turns off, but this does allow some monitors to provide power+USB+one display over a single C cord to enable clamshell mode.

Kind of unrelated but it sucks that Macs don't do multiple displays over a single cable because Apple refuses to support it in their GPU via the built-in MST hub (that otherwise is put to use for driving the Pro Display XDR).