What is IRR?
Internal Rate of Return (IRR) is the time-weighted return metric used to measure venture fund performance. Mathematically, IRR is the discount rate that makes the net present value of all cash flows (capital calls and distributions) equal to zero. In plain terms: it answers “what annualised rate of return did this investment / fund actually deliver?”
How IRR is calculated
IRR requires three inputs: the date and amount of every capital call (cash out), every distribution (cash in), and the residual NAV at the measurement date. Most LP reporting platforms (eFront, Bloomberg AIM) compute IRR automatically — but the result is sensitive to timing assumptions, especially for unrealised NAV.
IRR vs. MOIC — why both matter
IRR captures speed; MOIC captures size. A fund that returns 3× in 3 years has a ~44% IRR; the same 3× in 8 years drops to ~15% IRR. Top-quartile US venture funds typically target 25%+ net IRR and 3×+ net MOIC. Pension fund and sovereign wealth fund allocators usually require both metrics in due diligence — IRR for liquidity timing, MOIC for absolute scale.
Why “fast 3× beats slow 5×”
From an LP’s capital-velocity perspective, a quick 3× redeployed into a second 3× generates a 9× outcome in the same window where a single 5× generated only 5×. This drives GP preference for “growth-equity exits” (faster but smaller multiples) over “venture-style home runs” (huge but slow) when the fund’s vintage is mature and the GP is fundraising the next vintage.
IRR caveats — the gaming risk
IRR is sensitive to manipulation: subscription credit lines (warehouse lines that delay capital calls), early-recycling, and aggressive NAV markups can all inflate reported IRR without changing the ultimate cash returned to LPs. Sophisticated LPs cross-check IRR against DPI as the cleanest test of real performance.
Related: MOIC, Fund Returns, J-Curve, Power Law, Carry.