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.
IRR is the metric LPs use to compare funds and asset classes on a common, annualized basis — and the one most easily flattered. GPs know this, which is why fundraising decks lead with IRR when it looks good and bury it when it doesn't. A fund with a high IRR and a 1.5x multiple returned money fast but not much of it; a fund with a lower IRR and a 4x multiple made its investors far more money, just more slowly.
There are three common ways IRR gets inflated without changing the underlying multiple. Timing: returning a small amount of money early spikes the annualized rate. Subscription credit lines: a fund that borrows to make investments and calls LP capital later shortens the measured holding period. Early markups: marking one company up in year two annualizes a paper gain into a huge number. None of these change DPI or MOIC, which is why LPs check them side by side.
Gross IRR is calculated on the fund's investments before fees and carried interest; net IRR is what LPs actually earned after both. The gap is material, so always ask which one is being quoted. The textbook IRR math also implicitly assumes interim cash flows can be reinvested at the same rate, which flatters funds with volatile, early cash flows.
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.
How does IRR relate to MOIC?
They're two views of the same cash flows. MOIC answers how much came back relative to what went in, ignoring time; IRR answers how fast it came back, as an annualized rate. A 2x return in 2 years is roughly a 41% IRR; the same 2x over 10 years is roughly 7%. You need both to judge a return.
What's the difference between gross IRR and net IRR?
Gross IRR is measured on the fund's investments before management fees and carried interest; net IRR is what LPs earned after them. LP benchmarks and fund comparisons should use net IRR.
When is IRR meaningless?
In the first few years of a fund or deal, and whenever the cash flows are dominated by one early event. Negative interim IRRs are also normal early on, because fees and investments come before any returns — the J-curve. Benchmark providers often show young-vintage IRRs as not meaningful for exactly this reason.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.