The Dark Side of F&F Financing

When I launched my first startup, HomeYeah.com, in 1999, I raised money from family and friends. While I ultimately achieved an exit, it wasn’t the win we all had expected. I lost 100% of my net worth and 100% their invested capital. That pain — knowing I had cost people I loved their hard-earned savings — was brutal. I went from feeling like a promising entrepreneur to feeling like a disappointment. The guilt, grief, and emotional burden were crushing. I’m not alone.

Raising money from family and friends is often the easiest — and most common — way for entrepreneurs to get started. In the early years of a startup, both VCs and angel investors expect the riskiest phase — research and development — to be funded by those closest to the founder. It’s a long-standing norm in the venture world.

In fact, after founders’ personal savings, family and friends are the second-largest source of startup capital, with 38% of startups relying on them for initial funding (Kauffman Foundation, 2023). This money is given out of love, trust, and belief — not necessarily from an objective evaluation of the opportunity. And while this practice is deeply ingrained in startup culture, it carries hidden costs that can be detrimental, emotionally taxing, and even discriminatory.

Massive Market — And Massive Risks

According to Fundable, founders raise an estimated $60 billion from family and friends each year to fund their ventures, with an average investment of $23,000. This underscores the heavy reliance entrepreneurs place on personal networks for funding. However, with capital concentrated among a small circle of loved ones, this dependence carries a significant emotional and relational burden.

Entrepreneurship is inherently risky, but when funding comes from loved ones, that risk takes on a deeply personal weight. Failure isn’t just financial — it’s emotional and relational:

• Financial strain: If the venture fails, loved ones who couldn’t afford the loss may face real financial hardship.
• Founder guilt: Entrepreneurs often carry a heavy emotional burden when they lose money entrusted by family and friends.
• Damaged relationships: A failed business can strain or even permanently fracture relationships, turning financial setbacks into deep personal wounds.

Clearly, raising money from family and friends isn’t just about capital — it’s about trust, relationships, and emotional stakes that can far outlast the business itself.

The Discriminatory Nature of Family & Friends Financing

Family-and-friends financing is also fundamentally discriminatory, disproportionately limiting opportunities for entrepreneurs from underrepresented backgrounds. According to McKinsey’s report on the underrepresented founder experience, White families in America have, on average, 13 times the wealth of Black families and six times that of Hispanic families. As a result, founders without wealthy personal networks frequently must rely on cold outreach rather than warm introductions — drastically reducing their likelihood of securing early funding.

This structural barrier leaves many brilliant, innovative founders sidelined, unable to access even modest amounts of capital necessary for basic R&D. Consequently, their ideas remain trapped, perpetuating cycles of inequality and stifling innovation.

Family & Friends Funding Drives Less Aggressive Innovation?

Beyond emotional stress and discrimination, family-and-friends financing might negatively impact entrepreneurs' growth strategies. In a recently published study by Indiana University’s Kelley School of Business professors Donald F. Kuratko, Greg Fisher, and Regan Stevenson, researchers introduce the concept of "funding-source-induced bias" — a phenomenon where the closeness of entrepreneurs' relationships with investors triggers anticipated guilt, influencing strategic decision-making.

Using a sample of 193 entrepreneurs actively involved in incubator and accelerator programs, researchers confirmed this dynamic. Entrepreneurs funded by close personal connections consistently reported higher anticipated guilt related to risky decisions, prompting them to pursue lower-risk, less ambitious growth strategies. Thus, while family-and-friends financing may help ventures get started, it simultaneously undermines their ability to achieve breakthrough success.

To expand innovation, we need a better way to capitalize R&D rounds

Every year, I ask my students about raising money from family and friends. Most hesitate. They recognize the risks, the pressure, and the potential for strained relationships. Yet, under the traditional venture model, many feel they have no other choice.

The usual advice? “Manage” the transaction carefully to minimize future fallout — or worse, legal disputes. But the reality is, no matter how cautious founders are, personal relationships can still suffer. This isn’t just a challenge — it’s a major roadblock to entrepreneurship and innovation.

We can do better. The next generation of great innovators shouldn’t be limited by who they know — they should be empowered by what they can build. That’s the promise of VentureStaking™, a groundbreaking new model of venture investing.

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