What is IRR in venture capital?

IRR — Internal Rate of Return — is the primary metric used to measure the time-adjusted performance of a VC fund or individual investment.

Unlike simple multiple-of-invested-capital (MOIC), IRR accounts for how long it takes to generate returns. A 3x return in 2 years is far better than a 3x return in 10 years. IRR captures this difference.

How it's calculated: IRR is the discount rate at which the net present value (NPV) of all cash flows (investments out, distributions in) equals zero. In practice, most investors calculate it using Excel's XIRR function.

What's a good IRR? Top-quartile VC funds typically target net IRRs (after fees and carry) of 25%+ for early-stage funds. Median performers are in the 10-15% range. IRR benchmarks vary by vintage year and stage.

Gross vs. net IRR: Gross IRR is calculated before management fees and carried interest. Net IRR is what LPs actually receive. The difference can be 5-7 percentage points — always compare net IRRs when evaluating funds.

The IRR problem: IRR can be gamed. A fund that returns capital quickly (from early exits) will show a high IRR even if the multiples are modest. This is why DPI (distributions to paid-in capital) and TVPI (total value to paid-in capital) are equally important alongside IRR.