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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