The three ways to fund a subscription business

Because the cost to acquire a customer (CAC) is typically paid long before the customer's lifetime value (LTV) is realized, a growing subscription business requires cash to fund its expansion. There are three primary strategies for sourcing this cash.

1. Bootstrapping (Rob Peter to Pay Paul)

This strategy involves using cash from a traditional, non-recurring part of the business to fund the development and growth of the subscription offering.

• How it works: A web design agency uses the profits from large, one-off projects to build a SaaS project management tool (like Basecamp).
• Pros: You maintain full ownership and control of the company. You can grow at your own pace.
• Cons: It is much slower. It may not be viable in a "winner-take-all" market where speed is critical.

2. Venture Capital (Outside Money)

This involves selling equity in your company to professional investors in exchange for the capital needed to grow quickly.

• How it works: You demonstrate a strong LTV:CAC ratio, and investors provide the cash to scale your sales and marketing efforts.
• Pros: Allows for very rapid growth. "Smart money" can bring valuable expertise and connections.
• Cons: You give up equity and some control. Investors will expect a large exit (sale or IPO) within a specific timeframe, which may not align with the founder's vision.

3. Charging Upfront (The Cash Spigot)

This strategy involves structuring your subscription offer to get more cash upfront, ideally making each new customer immediately cash-flow positive.

• How it works: Instead of charging monthly, you charge for a full year in advance. You can also add a one-time setup or initiation fee.
• Pros: It can completely eliminate the cash trough, turning growth into a "cash spigot." It allows for rapid growth without giving up equity.
• Cons: Asking for a large upfront payment can increase the difficulty of the sale and may lengthen the sales cycle.

The right strategy depends on the founder's goals, the market dynamics, and the efficiency of the business model, which can be measured by the CUF:CAC ratio.