IRR (Internal Rate of Return)
The annualized rate of return on an investment, accounting for the timing of cash flows.
Definition
IRR is the annualized rate of return that accounts for the timing and magnitude of all cash flows (capital calls and distributions). Unlike MOIC, IRR penalizes investments that take longer to generate returns. A 3x return in 3 years has a much higher IRR than 3x in 10 years. Top-quartile VC funds target 20-30%+ IRR. IRR is the standard metric for comparing investment performance across different time periods and asset classes.
Why it matters
IRR captures the time value of money. If your company takes 10 years to exit, the IRR for early investors may be modest even if the MOIC is high. This is why VCs often prefer faster exits, and why they may push for a $500M exit in year 5 over a potential $1B exit in year 10.
Example
A VC invests $10M and receives $50M back 4 years later. MOIC is 5x. IRR is approximately 50%. If the same $50M came back in 8 years, MOIC is still 5x, but IRR drops to approximately 22%.