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 ca...

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Bibliographic Details
Published in:Small business economics 1996-02, Vol.8 (1), p.49-58
Main Author: Cressy, Robert
Format: Article
Language:English
Subjects:
Bank accounts
Business
Business expansion
Business financing
Business growth
Business structures
Capital formation
Cash flow
Coefficients
Entrepreneurs
Human capital
Income
Proprietors
Small and medium sized enterprises
Start up firms
Startups
Studies
United Kingdom
Variable coefficients
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Summary: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.
ISSN:0921-898X
1573-0913
DOI:10.1007/BF00391975