IRR
Also known as Internal Rate of Return, Since-Inception IRR, Net IRR, Money-Weighted Return
IRR (internal rate of return) is the annualized discount rate that sets the net present value of a fund's cash flows to zero. In venture, it is calculated from inception using contributions as outflows, distributions as inflows, and the ending NAV as a residual inflow, so it weights returns by both timing and dollar size.
Formula
0 = sum over t of CF_t / (1 + IRR)^t- CF_t
- Net cash flow at time t (capital call negative, distribution positive)
- Ending NAV
- Final-period residual value treated as a positive CF in the last t
- t
- Time in years (or fractional years) from fund inception
- IRR
- The annualized rate that solves the equation
In depth
IRR is a money-weighted return. Unlike a public-market time-weighted return that strips out the effect of when cash moved, IRR rewards GPs for calling capital late and distributing early. Cambridge Associates uses the pooled horizon IRR for its industry benchmarks: aggregate every fund's cash flows into one stream and solve for the rate that zeros the NPV. Invest Europe recommends calculating on daily or monthly cash flows, never yearly, because grouping calls into a single annual bucket distorts the rate.
The math has no closed form. Spreadsheets use XIRR for irregular dates or IRR for periodic flows. Both iterate until the discount rate produces NPV = 0. Multiple sign changes in the cash flow stream can produce multiple mathematically valid IRRs, which is one reason IRR is unreliable when a fund has bridged distributions then re-called capital.
Why it matters
Net IRR is the headline number on the cover of every LP report and the metric that most public pension and endowment performance committees benchmark against. It is also the most gameable. A GP who recycles early proceeds, draws subscription lines instead of LP capital, or marks up positions on small follow-on rounds can inflate reported IRR by hundreds of basis points without changing realized value. Reading IRR alongside DPI and same-vintage peer rank is the standard defense.
Worked example
A fund of $100M deploys, distributes, and marks as follows:
| Year | Cash flow | Note |
|---|---|---|
| 0 | -$100M | Initial commitment |
| 3 | +$30M | First exit |
| 5 | +$60M | Series of exits |
| 7 | +$80M | Ending NAV |
Solving XIRR on this stream:
0 = -$100M + $30M/(1+r)^3 + $60M/(1+r)^5 + $80M/(1+r)^7
r = 18.4%
Net IRR of 18.4% with TVPI of 1.7x. If the same $170M arrived only at year ten instead, IRR falls to about 10.5% even though the multiple is identical.
Frequently asked
What is a good IRR for a venture capital fund?
Net IRR for top-quartile venture funds typically lands in the 20% to 30% range over the full fund life, with buyout top quartile in roughly the 15% to 20% range per Cambridge Associates pooled benchmarks. Sub-10% net IRR usually puts a fund below median once the J-curve has played out.
How is IRR different from TVPI and MOIC?
TVPI and MOIC are multiples of capital and ignore time. A 3.0x TVPI delivered in five years and the same 3.0x delivered in fifteen are identical on a multiple basis but very different on IRR. LPs read IRR with TVPI and DPI together because a high IRR with low DPI often reflects early markups, not realized cash.
Why can IRR be misleading in venture?
Early markups inflate IRR disproportionately because they compress positive cash flow into year one or two. A single Series B mark on a year-two position can drive 50%+ IRR while DPI remains near zero. Sophisticated LPs anchor IRR analysis to fund age and same-vintage peers.
Net IRR vs gross IRR, what's the difference?
Gross IRR is calculated on portfolio company cash flows before fees and carry. Net IRR is what the LP earns after management fees, fund expenses, and carried interest. Net IRR is the relevant headline number; the gap between gross and net is typically 400 to 800 basis points over the life of the fund.