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Business Start-Up Support for Young People, Delivered by The Prince’s Trust
A Comparative Study of Labour Market Outcomes

Meager N, Bates P, Cowling M
Research Report DWPRR 184, Department for Work and Pensions, March 2003

a report for the Department for Work and Pensions

This report examines the effectiveness of the Business Programme of The Prince’s Trust and analyses the longer-term labour market outcomes of young adults who are supported into self-employment. The study was commissioned by the former DfEE in 1999 and carried out by the Institute for Employment Studies (IES) and Marc Cowling of the London Business School (LBS). The survey fieldwork was undertaken by MORI.

Key findings

• The Prince’s Trust has been successful in recruiting onto the business-support programme those disadvantaged groups for whom it has explicit targets (ethnic minorities and those with long-term health problems or a disability), and women are also better represented among Prince’s Trust clients than among the self-employed in general.
• One-third of clients recruited by the Trust were, however, found to have obtained a degree equivalent, or higher, qualification (NVQ level 4 or 5).
• Ethnic minorities received significantly more funding than white clients although women received less funding than men and older applicants received more than their younger counterparts.
• Four out of five clients received support from a Business Mentor. An overwhelming majority (90 per cent) thought that it had been ‘useful’ in helping them build their business.
• Overall, 70 to 75 per cent of Prince’s Trust supported businesses were still trading after 18 months; after four years the survival rate fell to 50 per cent.
• Businesses were more likely to survive if their founder-owners were white, older, had a family background of self-employment, were neutral or averse to taking risks, were motivated to start a business by a desire for independence or an individual lifestyle, and, were educated to degree level (NVQ level 4) or equivalent.
• Businesses in the South were also more likely to survive, as were those which had established a broad geographical market, and those which were supported by a Business Mentor.
• The amount of funding received from the Trust did not have any statistical influence on the chances of business survival.
• Over the 21 months between the first and third interviews, the average turnover of surviving businesses grew by nearly two thirds from £610 to £1,000 per week.
• However, a high proportion of those who survived in business worked long hours and took home very low earnings: at the end of the study nearly a fifth of those running Prince’s Trust-supported businesses and working more than 30 hours earned less than £50 a week (approximately the level of JSA).
• Most of those who had ceased trading and had found work said that the experience of running a business was beneficial in helping them to find and maintain their current jobs. However, statistical analysis showed that a period of self-employment did not provide any particular advantages, either as a ‘stepping-stone’ to finding subsequent employment, or in terms of subsequent earnings levels.

Summary of research methodology

The study interviewed a sample of 2,000 young people across England who started their Prince’s Trust-supported business in the two years before the first survey wave. The young people were matched against a comparison group of people of a similar age, gender and initial labour market status and both groups were followed for two successive waves of interviews up to December 2001. The labour market outcomes of both groups were compared in terms of business survival, earnings and employability.

Recruitment

The Prince’s Trust Business Programme helps 18-30 year olds to start businesses. It particularly focuses on those who are unemployed, underskilled, within or leaving the criminal justice system or leaving care. To get funded, clients must have been refused funding by other sources. The survey showed that, before starting their business, 42 per cent of clients were unemployed, 21 per cent were economically inactive (nearly half in full-time education), and 37 per cent were in work.

Eleven per cent of clients were from ethnic minorities, 12 per cent had a long-term health problem or disability and 39 per cent were female (these percentages are higher than the share of these groups in the overall self-employed population). Although some disadvantaged groups were well represented among clients of The Prince’s Trust, the study also showed that:

• over one-third of clients were educated to NVQ4 or 5 level or equivalent (first degree level or higher)
• within the age range helped by The Prince’s Trust, clients were disproportionately drawn from the older end (at the first survey wave, when clients had been trading for up to two years and three months, one-fifth were aged 30 or older, and only ten per cent were 21 or younger)
• nearly half had a family background of self-employment (at least one self-employed parent)
• 16 per cent had self-employment experience prior to starting their Prince’s Trust-supported business.

Funding for start-up businesses

The Trust offers low interest loans of up to £5,000, and grants of up to £1,500. The Trust aims to allocate to each client a volunteer Business Mentor, providing support during the first three years of trading. In practice, 91 per cent of clients received a loan, with 55 per cent receiving a start-up grant, and 14 per cent a ‘test-marketing grant’. Most clients received between £1,500 and £3,500 from the Trust, with the average funding being £2,695. On average:

• clients from ethnic minorities received significantly more funding than white clients

• men received more than women
• the over-25s received more than their younger counterparts.

Most but not all clients (79 per cent) received support from a Business Mentor, though a higher proportion (nearly 90 per cent) in London, the South East and Eastern regions received mentoring. Over 90 per cent found the mentoring very useful or quite useful.

Although The Prince’s Trust targets people who have been rejected for funding elsewhere, 58 per cent of clients also had start-up funding from other sources. With an average value of £2,748, such funding was on a similar scale to that provided by The Trust, and was mainly drawn from personal savings, bank loans or family/ friends.

Survival of start-up businesses

Some 70-75 per cent of Prince’s Trust-supported businesses were still trading at 18 months after start-up. The survival rate fell to around 50 per cent as the businesses approached four years of trading.

Statistical analysis showed that businesses were more likely to survive if their founders:

• were of white ethnic origin
• were older (although the effect of age is not a strong one, businesses started by clients in the 18-21 age range exhibit the lowest survival rates)
• had a family background of self-employment (that is, either or both of their parents had self-employment experience)
• had a neutral or averse attitude to risk-taking. Despite the common perception that entrepreneurial behaviour is associated with a willingness to take risks, it was notable that the most ‘risk averse’ individuals had the highest survival rates, and that this pattern was statistically significant
• were motivated by a desire for independence and lifestyle (rather than growth or income) in starting their business
• were educated to degree level (NVQ level 4) or equivalent.

By contrast, personal characteristics such as gender, disability, and household circumstances did not lead to clear differences in survival rates. Once the influence of other factors was taken into account through multivariate statistical analysis there was little evidence that those who had been in work prior to business start-up had higher survival rates than those who had not been working.

Higher survival rates were found among businesses:

• in the south compared to northern regions
• in particular sectors (the lowest survival rates were in distribution and catering, and in business and financial services)
• with a broader geographical market. The amount of start-up funding provided by The Prince’s Trust had no clear influence on survival rates. Survival rates were higher (and the difference statistically significant) among those being supported by a Prince’s Trust mentor and among those who said they would have started their businesses anyway (without support from The Trust).

How well have they performed?

Over the 21 months between survey waves 1 and 3, the average turnover of businesses surviving at both waves grew from £610 to £1,000 per week. Despite this growth, however, 76 per cent of the businesses had no employees by wave 3.

Between survey waves 1 and 3, the average net job creation per surviving business was 0.44 jobs per business (which compares well with data from previous studies of new start-ups). Earnings (pre tax) of Prince’s Trust clients also grew between waves 1 and 3, but by wave 3, a significant proportion were still earning relatively little from the business: 26 per cent earned less than £50 per week, 40 per cent earned £50-199 per week, and 21 per cent earned £200 per week or more.

Clients who were in work prior to starting their business earned significantly less from their businesses than did those who were not working immediately prior to start-up.

A significant proportion of clients worked very long hours (at wave 3, 25 per cent worked 51 hours or more, and 10 per cent 61 hours or more). Of those working 51 or more hours per week, a fifth earned less than £1 per hour, and two-thirds earned less than £4 per hour.

The problems faced by clients

By wave 3, the main constraints facing trading businesses related to cash flow (21 per cent), fluctuating demand (19 per cent) and marketing/ advertising (16 per cent). Very few were concerned with access to credit (4 per cent) or to capital (3 per cent), and hardly any were concerned with government regulations (2 per cent) or taxation issues (2 per cent). Similarly few (4 per cent) had anxieties about economic downturn or recession, and most (75 per cent) expected sales growth in the year ahead.

What happened to those who ceased trading?

The proportion of non-survivors who found work increased between waves, and by wave 3, 59 per cent had a job (with nearly a quarter of these being self-employed). At wave 3, 60 per cent of employed non-survivors said their experience in running the Prince’s Trust-supported business had been quite or very helpful in finding their current job, and 58 per cent said the skills and knowledge acquired in starting their own business had proved quite or very relevant in helping them to do their current job.

It is notable, however, that those who were in work (employed or self-employed) immediately before starting their Prince’s Trust-supported business were much more likely to find work subsequently than those who had been out of work prior to start-up (78 per cent and 51 per cent respectively). Non-survivors who found work, moreover, tended to have longer working hours and higher earnings levels if they had been in work prior to start-up, than if they had been unemployed or inactive prior to start-up. Furthermore, non-survivors who found work were generally earning more before tax than their counterparts still running their Prince’s Trust-supported businesses (at wave 3 only 4 per cent earned less than £50 per week, and 35 per cent earned more than £200 per week). They were also less likely to be working long hours (at wave 3 only 12 per cent worked 51 or more hours per week).

How do the Prince’s Trust clients fare against a comparison group?

Prince’s Trust clients were much more likely than comparison sample members to be in work. This greater chance of being employed, however, is entirely due to those who are still running their business. Those whose businesses had ceased trading were no more likely to be in work than their counterparts in the comparison sample by wave 3.

In both samples, the likelihood of being in work at wave 3 was much greater if the individual was in work before starting their Prince’s Trust-supported self-employment.

Prince’s Trust non-survivors in work and their counterparts in the comparison sample had similar median pre-tax earnings at wave 3. Both groups had much higher wave 3 earnings than those still running their Prince’s Trust-supported businesses.

Statistical analysis shows that Prince’s Trust participation had a significant and positive impact on self-employed earnings; ie those in the Prince’s Trust sample earned more when self-employed than did the self-employed in the comparison sample.

Being in the Prince’s Trust sample, however, made no difference to subsequent earnings as an employee at wave 3, compared with members of the comparison sample with similar characteristics. Employment status at a date immediately prior to starting the Prince’s Trust-supported business was, however, an important influence on subsequent earnings.

Business Start-Up Support for Young People, Delivered by The Prince’s Trust: A Comparative Study of Labour Market Outcomes, Meager N, Bates P, Cowling M. Research Report DWPRR 184, Department for Work and Pensions, 2003.
ISBN: 978-1-84123-550-9. £39.50. [PDF price: £free]

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