How to Calculate IRR: Internal Rate of Return for VC Fund Performance

Internal Rate of Return (IRR) is the annualized return on an investment, expressed as a percentage. It's how venture capital funds report performance to their LPs, how fund managers compare deals, and how institutional investors evaluate whether a VC fund deserves a second commitment.

IRR is also one of the most misunderstood metrics in finance. This guide explains what it is, how to calculate it, what the numbers mean by fund stage, and the common errors that lead founders and investors to misinterpret it.

What Is IRR?

IRR is the discount rate that makes the net present value (NPV) of all cash flows from an investment equal to zero. In plain English: it's the annualized rate of return you earned, accounting for the timing of when money went in and when it came back out.

Unlike MOIC (which only measures magnitude), IRR accounts for time. A 3x return in 3 years is dramatically better than a 3x return in 10 years — and IRR captures that difference.

The Formula

IRR is defined implicitly as the rate r that satisfies:

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0 = CF₀ + CF₁/(1+r) + CF₂/(1+r)² + … + CFₙ/(1+r)ⁿ