Pre-entrepreneurial income,cash-flow growth and survival of startup businesses: Model and tests on U.K. data

A target income/human capital model of startup survival and growth is derived and tested. The objective of the entrepreneur is to produce an independent source of income for him/herself to replace income from previous employment. Target income is a function of pre-entrepreneurial income and human capital represented by age. The model predicts that higher pre-income entrepreneurs and more mature individuals will grow faster to achieve these targets and that growth is an ambiguous function of size. It also predicts that these same individuals, and businesses that start larger, will be more likely to survive. The key results of the empirical analysis are that (a) businesses run by proprietors with higher pre-entrepreneurial incomes do indeed grow faster than other startups but have no greater survival prospects, and (b) businesses run by mature proprietors possess greater longevity. We conclude that business income targets in practice constitute a significant motivation for startup growth, and that the human capital represented by age plays no additional role. However, proprietor age rather than pre-income determines survival, despite the fact that pre-income and age are positively correlated both with each other and with growth.National Westminster Bank Principal Research Fellow and Assistant Director (Research) of Warwick University SME Centre. This research is part of a wider study financed by the National Westminster Bank of Great Britain. I am indebted to the Bank for the provision of the raw data. Needless to say the views expressed here are those of the author and not necessarily those of NatWest.