As long as the money is private, they should be able to do whatever they want. If they're actually bad decisions (a worse startup getting money solely due to being inside), then they'll suffer for it. If the decision however gives a return, then what's the problem?

I don't feel suspicious of family's investing in their kid's venture -- wow how unfair! so biased, they should have given the kid next door a fair listening to as well!

The problem only arrises if bad decisions are then publicly de-risked (as is the case in banks, etc -- don't know specifically if this happens in an indirect way with VC's). But in and of itself -- "people you know" is one of many possibly good or bad metrics you can use to invest your own money (or the money interested to you by funders that know how you operate).