Research by Experian reveals business start-up numbers increase amongst young entrepreneurs
Young entrepreneurs’ start up survival rates boosted by partnering with older directors
The number of young entrepreneurs starting up their own business has increased by nearly a quarter (22%) in the past three years, according to research out today by Experian®, the global information services company. However, almost half of these businesses (45%) are wound up within two and a half years and a further 22% fail between two and a half and three years.
However, the research also reveals that the survival rate for start-ups increases if there is an older director on board. When a young director, aged between 16 and 25 teams up with someone aged 26 or older, 39% of businesses survive post three years (compared to just a third when started by a sole young director). Survival rates soar to 48% when a young director joins forces with more than one older director, demonstrating the clear advantages for young entrepreneurs to tap into the experience, industry knowledge and expertise that exists amongst more experienced directors.
Simon Streat, Managing Director of Experian’s UK SME business, commented: “Such strong entrepreneurial appetite amongst young people is exciting and encouraging to see, yet just one third of business start ups with a young sole director survives for more than three years. With young directors often lacking the experience, capital and contacts needed to survive those first few tricky years, our research shows that they shouldn’t underestimate the value in partnering with an older director. The reality is that start ups comprising both young and older talent have a greater chance of survival than those businesses that start up with just young directors aged between 16 and 25.”
Sector analysis
The analysis also highlights that young directors are 57% more likely to start up a business in sectors defined as ‘vulnerable’ by Experian than those sectors defined as resilient.
Vulnerable sectors include construction, retail and hotel/catering – essentially sectors where short term operating conditions remain challenging and the likelihood of failure is often higher than in resilient sectors. Overall start-up growth has been higher within knowledge intensive and high tech industries, a positive sign for future growth. While these sectors are more resilient and survival rates can be higher, specialist knowledge may be a contributing barrier to entry.
Simon commented: “It is definitely more difficult to trade in a vulnerable sector right now, but by no means impossible. The high number of starts ups in vulnerable sectors might be because barriers to entry are often lower than in knowledge intensive and high tech industries. This makes experience, even from an older director that more crucial – there are champions in every sector.”
Impact of unemployment
The total number of business start-ups over the past three years has been driven predominantly by sole directorship companies, which now comprise around two thirds of all start-ups. Areas that have a high level of unemployment have seen higher levels of start-ups which may be because those who are unemployed see fewer options than to set up on their own. Some areas with high unemployment have also experienced a higher rate of business insolvencies indicating a lack of market demand for their services in those areas, or a lack of business skills.
Regional change
The table below shows the increase in all start-ups between 2008 and 2010 versus the number of firms started up by young directors, by region.
The East Midlands region saw the highest increase in the number of young directors setting up their own businesses. A number of factors may have influenced this, including the success of programmes in the region aimed at specifically helping young people set up their own businesses.
Advice for young start-ups
Before any entrepreneur decides to start up his or her own business, they should take note of the following:
• Know your sector: there are many successful firms even in vulnerable sectors, but understanding the risks and challenges of the target sector is vital
• Know your area: make sure there is a demand for the service or product if targeting a specific region
• Investigate business courses and formal qualifications: business skills play a key role as insolvencies are higher among directors with no qualifications
• Seek independent advice: business support networks and schemes such as the Prince’s Trust New Business programme which is supported by Experian help young people set up and run successful businesses
• Experience matters: young entrepreneurs should consider partnering with an older director. Some of the most successful, high growth start-ups have been a combination of an older and a younger director
• Check your suppliers and customers: young directors in particular may not consider the financial position of their customers and suppliers until they discover they are not being paid or one of their key suppliers has become insolvent
• Investigate all available finance options: banks loans are not the only form of funding. There may be more appropriate finance options that meet a specific start-up’s needs
Simon continued: “It is crucial for young entrepreneurs to tap into business support networks for advice and consider undertaking formal qualifications to boost their marketing, sales and finance nous. Without these core skills, start-ups will struggle to fulfil even the most innovative business ideas.”
