Research Summary

Business start-up support for young adults delivered by the Prince’s

Trust: a comparative study of labour market outcomes

By Nigel Meager, Peter Bates and Marc Cowling

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). MORI undertook the
survey fieldwork.
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.
• A 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-

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 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, under-
skilled, 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.
11 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 a 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; and
• 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%) 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; i.e. 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.
The full report of these research findings is
published for the Department for Work and
Pensions by Corporate Document Services
(ISBN 1 84123 550 4. Price £39.50. Research
Report 184. March 2003).
It is available from Corporate Document
Services, 7 Eastgate, Leeds LS2 7LY.
Tel: 0113 399 4040. Fax: 0113 399 4205.
E-mail: cds@corpdocs.co.uk
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