Formula
How to Calculate Internal Rate of Return (IRR)
The annualized return rate that makes the net present value of all cash flows equal to zero — the standard VC performance metric.
Internal Rate of Return
0 = Σ CFt / (1 + IRR)^t
Where
- CFt
- = Cash flow at time t
- IRR
- = Discount rate that makes NPV equal to zero
- t
- = Time period
What Is Internal Rate of Return (IRR)?
IRR measures the annualized percentage return on invested capital, accounting for the timing of cash flows. A fund that returns 3x in 5 years has a higher IRR than one returning 3x in 10 years. Top-quartile VC funds target 25%+ net IRR.
Worked Example
The fund invested $10M in 2020, received $5M from an early exit in 2023, and the remaining portfolio was valued at $40M in 2026 — generating a 45% gross IRR.
Why Internal Rate of Return (IRR) Matters
IRR is the primary metric LPs use to compare VC fund performance. It penalizes slow deployment and long holding periods, creating urgency to return capital efficiently.
Related Terms
Frequently Asked Questions
How do you calculate Internal Rate of Return (IRR)?
Internal Rate of Return (IRR) is calculated using the formula: 0 = Σ CFt / (1 + IRR)^t. The annualized return rate that makes the net present value of all cash flows equal to zero — the standard VC performance metric.
What is a good Internal Rate of Return (IRR)?
What constitutes a "good" Internal Rate of Return (IRR) depends on context — the fund's stage, vintage year, and strategy. Check our benchmarks and calculators for specific ranges.