VC Metrics & Performance
What is IRR and how do VCs use it?
IRR (Internal Rate of Return) is an annualized return metric that accounts for the timing of cash flows. VCs use it alongside MOIC to measure fund performance — MOIC shows how much money was made, IRR shows how quickly.
IRR measures the annualized return on an investment, accounting for when cash goes in and comes out. Unlike MOIC (which just measures total multiple), IRR penalizes slow returns and rewards fast ones.
Formula intuition: IRR is the discount rate that makes the net present value of all cash flows equal to zero. In practice, it's calculated iteratively.
Why both metrics matter: - A 3x MOIC over 10 years is an ~12% IRR — decent but not exceptional - A 3x MOIC over 4 years is a ~32% IRR — outstanding - A 5x MOIC over 10 years is a ~17% IRR - A 5x MOIC over 5 years is a ~38% IRR
VCs report both because each tells a different story. MOIC tells you if money was made. IRR tells you how efficiently time was used. LPs care about IRR because their capital is tied up and they're comparing VC returns against other asset classes on a time-adjusted basis.
Top VC funds have historically achieved net IRRs of 20–35%+. The best vintage years (e.g., 2009–2012) produced much higher IRRs due to favorable entry valuations and a strong exit environment in subsequent years.
IRR can be manipulated by timing capital calls — calling capital late in a fund's life makes IRR look better because the denominator (time capital is deployed) shrinks. LPs are aware of this and look at both gross and net IRR, as well as DPI (actual cash returned).