The Hidden Costs of Borrowing from Family and Friends

When entrepreneurs lack the funds to launch their ventures, they often turn to the people closest to them—family and friends. This kind of support can seem ideal: the money is easier to access and comes with fewer strings attached than formal investments. But new research from Indiana University’s Kelley School of Business reveals a potential downside: borrowing from loved ones may lead entrepreneurs to play it too safe.

Causing caution

The study, which analyzed 193 entrepreneurs in incubator and accelerator programs, found that taking money from family and friends often makes founders more cautious. Strong personal ties to investors can create a “funding-source-induced bias.” In simple terms, entrepreneurs worry more about letting down their loved ones if the business fails, which leads them to avoid risky decisions that could drive growth.

“When the relationship with an investor is close, founders are more likely to feel guilt when considering choices that might result in failure,” the researchers explain. This fear of guilt nudges entrepreneurs toward safer, more conservative strategies—sometimes at the expense of innovation and boldness.

Family and friends are a popular source of early-stage funding for a good reason: the money is often more flexible, and the terms are less rigid. However, this research shows that the emotional stakes are higher, too. If the business doesn’t succeed, personal relationships can suffer. To avoid this, founders may make decisions to protect these relationships more than maximize the venture’s potential.

A crucial factor

The researchers highlight this bias as a crucial factor in entrepreneurial decision-making. Borrowing from people you care about can subtly change how you approach risk. Instead of focusing solely on the venture’s success, founders may worry about disappointing their investors, which can lead to less daring—but potentially less effective—choices.

For entrepreneurs, mentors, and educators, the takeaway is clear: while family and friends can be a valuable funding source, founders should be mindful of how these relationships might affect their judgment. Knowing the emotional dynamics at play can help entrepreneurs balance the benefits of close support with the need to take calculated risks.

“By exploring this funding-source-induced bias, we hope to encourage more research on how different kinds of investors influence entrepreneurial decisions,” the researchers say. Their work reminds us that borrowing from loved ones is not just a financial decision—it’s an emotional one, too.

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