IRR

TL;DR

Internal Rate of Return — the annualized return that makes the net present value of all fund cash flows equal to zero.

IRR is the time-weighted annualized return on an investment or fund. Unlike MOIC, IRR rewards returning capital quickly: doubling money in 1 year is a 100% IRR, while doubling money in 5 years is about 15%. LPs use IRR alongside MOIC because the same MOIC can imply very different actual investor experiences.

IRR is sensitive to early distributions and to large recent marks. A fund that returns capital quickly through an early exit can show extraordinary IRR even if total MOIC ends up modest.

Formula

IRR = rate r such that Σ (Cash Flow_t ÷ (1 + r)^t) = 0

• Cash Flow_t — Net cash flow in period t (negative for capital calls, positive for distributions)
• t — Time index in years (or fraction of years) since fund inception

IRR rewards early distributions; a 3.0× MOIC realized in 4 years has higher IRR than the same 3.0× realized in 10 years.

Worked example

Fund called $100M in year 1, distributed $50M in year 4 and $250M in year 7. Solving Σ CF/(1+r)^t = 0 yields IRR ≈ 19% — strong top-quartile performance for a vintage with that distribution shape.

Common pitfalls

• Comparing IRR across funds with very different durations.
• Ignoring IRR's sensitivity to early distribution timing.
• Treating IRR as the only metric instead of combining with MOIC and DPI.

When this shows up in a pitch deck

Fund-level metric; surfaces in founder context when discussing prior investor performance or expected return profile.

See IRR in context

IRR shows up most often in these scoring rubrics and investor profiles — jump straight to who cares about it and how to pitch them.

In VC frameworks

• Family Office — pitch deck framework

For investor types

• Family Office — Risk & Returns
• Private Equity — Profitability & Scale

Related terms

• MOIC — Multiple on Invested Capital — total value (realized + unrealized) divided by total capital invested, a simple time-insensitive return metric.
• TVPI — Total Value to Paid-In capital — the sum of distributions and remaining NAV divided by capital paid in, used by VC LPs.
• DPI — Distributions to Paid-In capital — the cash a fund has returned to LPs divided by total capital called, the realized portion of TVPI.
• J-Curve — The pattern of early-fund losses followed by later gains as investments mature, which produces a J-shaped cumulative return chart for VC funds.
• Carry (Carried Interest) — The share of fund profits paid to the GPs above a defined hurdle, typically 20% in venture funds — 'carry' is the GP's economic upside.

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