IRR (Internal Rate of Return)
An annualized percentage return that accounts for the timing and size of all cash flows into and out of an investment.
IRR is the annualized rate of return that makes the net present value of all cash flows — capital calls (negative) and distributions (positive) — equal to zero. Unlike a simple multiple like MOIC, IRR is time-weighted, meaning it rewards returns that happen faster, which matters a lot for LPs comparing funds or deals with different holding periods.
Because IRR is sensitive to timing, it can be manipulated or distorted more easily than DPI or MOIC — a fund can post a spectacular early IRR from one quick markup or a single fast exit, even if the eventual multiple on the whole fund turns out modest. It's also less meaningful for very young investments, since a small early gain over a short period annualizes into a misleadingly high number.
An investor puts $1M into a deal and gets $3M back after exactly 3 years — that's a 3x MOIC. The equivalent IRR is roughly 44% per year, since IRR compounds the return over the actual holding period; the same 3x return over 6 years would be a lower IRR (about 20%) despite the same multiple.
Always pair IRR with MOIC or DPI when evaluating a fund or deal — IRR alone can make a fast, modest win look better than a slower but far larger one, and it's the most commonly gamed metric in venture fundraising decks.
Why can IRR be misleading for young funds?
Because IRR annualizes returns, a small early markup in a fund's first year or two can produce a very high headline IRR that has little bearing on the fund's eventual overall performance.
Is a higher IRR always better than a higher multiple?
Not necessarily — IRR rewards speed, while a multiple (MOIC) measures total return regardless of timing; which matters more depends on whether an LP cares more about capital velocity or absolute dollars returned.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.