IRR
Internal Rate of Return
Definition
IRR (Internal Rate of Return) is the annualized rate of return that equates the present value of distributions with the present value of capital contributions. It accounts for when money was invested and returned.
In Simple Terms
IRR tells you the annual growth rate of your money. A 30% IRR means your investment grew by 30% per year. It's different from simple returns because it considers timing—getting $10M back in year 1 vs year 10 matters.
Why It Matters
IRR is the industry standard for comparing VC fund performance. Top-tier funds target 25-35% IRR. It's superior to simple returns because it penalizes slow distributions and rewards quick exits. LPs use IRR to choose managers.
Example
You invest $1M, get $3M back over 5 years. Simple return: 200%. IRR: ~24.5% per year. But if you got $3M back in year 10, IRR drops to ~11.6%—showing that timing matters.