Returns & Metrics
What is IRR (Internal Rate of Return)?
Quick Answer
IRR is the annualized return rate that makes the net present value of all cash flows equal to zero, accounting for the timing of investments and distributions. Top-quartile VC funds target 20-30% net IRR.
Detailed Answer
Internal Rate of Return (IRR) is the most widely used performance metric in venture capital because it accounts for the time value of money — unlike simple multiples like MOIC.
Formula: IRR is the discount rate (r) that solves: Σ [CFt / (1+r)^t] = 0
Where CFt = cash flow at time t (negative for investments, positive for distributions)
Example: If you invest $1M and receive $3M back 5 years later, the IRR is approximately 24.6% — meaning your money grew at 24.6% per year, compounded.
VC IRR benchmarks: - Top quartile: 20-30% net IRR - Median: 10-15% net IRR - Bottom quartile: Below 5% (or negative)
Important nuances: - **Gross vs Net IRR** — Gross is before fees/carry; net is what LPs actually receive. Net IRR is typically 5-8% lower than gross. - **TVPI vs IRR** — A 3x fund over 12 years has a lower IRR than a 2x fund over 4 years. Both metrics matter. - **J-curve effect** — Early in a fund's life, IRR is negative because management fees are deducted before any exits occur. - **DPI matters more** — Realized returns (DPI) are more reliable than unrealized IRR, which is based on estimated valuations.
Related Questions
What is ARR (Annual Recurring Revenue)?
ARR is the annualized value of recurring subscription revenue, calculated as MRR × 12. It's the primary growth metric for SaaS companies, with VCs typically expecting 2-3x year-over-year growth for Series A candidates.
What is MOIC (Multiple on Invested Capital)?
MOIC is the ratio of total value returned to total capital invested, regardless of time. A 3x MOIC means investors received 3 times their money back. Top-quartile VC funds target 2.5-3.5x net MOIC.
What is burn rate?
Burn rate is the monthly rate at which a startup spends cash beyond its revenue. Gross burn is total monthly spend; net burn is spend minus revenue. Runway = Cash on Hand ÷ Monthly Net Burn Rate.
What is TVPI in venture capital?
TVPI (Total Value to Paid-In) measures the total value of a fund relative to the capital called from LPs. It combines realized returns (distributions) plus unrealized portfolio value (NAV). TVPI = (Distributions + NAV) ÷ Paid-In Capital.