Meta title: What is IRR? Internal Rate of Return for Founders

Meta description: Learn how internal rate of return (IRR) works, what counts as a good IRR and how investor IRR targets can shape a founder's fundraising timeline.

Slug: irr

A partner mentions the fund's internal rate of return (IRR) halfway through your first fundraising meeting. That number tells you more about the fund's clock and its exit pressure than it first appears. This guide covers how IRR is calculated, what counts as a good one and how a fund's IRR targets shape the timeline it needs from your company.

What is IRR?

Internal rate of return is the annualized rate at which an investment grows, which is the discount rate that sets net present value (NPV) to zero. To calculate NPV, subtract discounted outflows from discounted inflows after bringing every cash flow back to today's value. Setting that value to zero and solving for the rate tells you what the investment earned per year on the money that stayed in it.

In plainer terms, IRR rises when the same proceeds arrive sooner because less time passes between the investment and its return. A million dollars returned next quarter compounds somewhere else for years; the same million returned in year nine doesn't. Economists call that gap the time value of money. It explains why investors care so much about when your outcome lands.

How to Calculate IRR

IRR needs the amount of each cash flow and the date it moved, and a spreadsheet does the arithmetic in one cell. Knowing what that cell is doing still pays off, because the mechanics explain why investors obsess over dates and not dollar amounts alone.

The IRR Formula

IRR is the rate that solves this equation: 0 = CF₀ + CF₁ ÷ (1 + IRR)¹ + CF₂ ÷ (1 + IRR)² + … + CFₙ ÷ (1 + IRR)ⁿ. Each CF is a cash flow in its period, and CF₀, the initial investment, goes in as a negative number. No algebraic rearrangement isolates the rate once there are more than a handful of periods. Excel solves it by iteration instead: it starts from an estimate and adjusts the rate up or down until NPV lands within a tiny tolerance of zero.

The Spreadsheet Functions

Spreadsheets ship two versions of the function, and the difference between them is the calendar. Plain IRR assumes cash flows land at regular intervals, monthly or annually, with no dates supplied. The XIRR function takes an exact date for every cash flow and discounts based on days elapsed divided by 365. XIRR fits private investments, where money in and money out arrive on specific dates years apart.

The Worked Example

An investor wires $100,000 into your seed round on January 15, 2023, and a hypothetical acquisition returns $300,000 to them three years later. Two dated cash flows are everything XIRR needs:

Date

Cash flow

January 15, 2023

negative $100,000

January 15, 2026

positive $300,000

Those two rows produce an XIRR of about 44.2 percent. Pushing the exit out to 2031 turns the same 3x into roughly 15 percent a year. The proceeds are identical in both cases, and the calendar alone accounts for a difference of nearly 30 percentage points.

How IRR Compares to NPV, MOIC and CAGR

Founders meet IRR alongside other fund performance metrics, and each comparison answers a different question. Multiple on invested capital (MOIC) and compound annual growth rate (CAGR) come up constantly in term sheet conversations. NPV appears whenever someone has to choose between two uses of the same dollar. The metric an investor quotes tells you whether they mean size of outcome or speed.

IRR vs. NPV

IRR answers in a rate and NPV answers in dollars. If you pick a discount rate up front, NPV tells you how much value a set of cash flows creates today. IRR works backward to find the rate at which that value is exactly zero. When the two rank mutually exclusive projects differently, NPV is the one to follow, since dollars of value created is what an investor keeps.

IRR vs. MOIC

MOIC divides what came out by what went in, and time never enters the calculation. A fund that turns $2 million into $8 million reports 4x whether that took five years or 15. IRR separates those two paths: the five-year version runs at roughly 32 percent a year and the 15-year version at roughly 10 percent.

IRR vs. CAGR

CAGR smooths a starting value and an ending value into one growth rate and ignores everything in between. Interim cash flows are exactly what IRR prices, and it uses the date each one moved. CAGR suits the revenue growth you report to your board, and IRR suits a fund with cash moving in and out.

What Counts as a Good IRR

Limited partners (LPs), the pensions and endowments behind venture funds, judge IRR against what the same capital could have earned in public equities. A decade of illiquidity and fees pushes that bar higher, and it moves by asset class with risk and hold length:

• Early stage venture: In 2025, United States venture funds returned 21.1 percent net IRR. Most companies a venture fund backs return little or nothing, so a small number of winners have to clear the highest bar in the set.
• Later stage venture and growth equity: Growth equity returned 11.9 percent in 2025, roughly half the venture figure, and target rates run lower for the same reason. Companies at this stage have revenue, lower failure rates and a shorter remaining hold before an exit.
• Private equity buyout: Top-quartile global buyout funds have returned 24 percent IRR over the past decade, against 15 percent total shareholder return for the S&P 500. Single years diverge sharply, and top-quartile buyout returned a pooled eight percent in 2025 while the S&P 500 returned 18 percent.
• Commercial real estate: Target rates step up with construction and lease-up risk, so stabilized income-producing deals carry the lowest bar and ground-up development the highest. Holds run long enough that a few months of exit timing move the annualized figure far less than they would in venture.

Risk of loss and length of hold drive the spread across these asset classes. Early stage venture has more of both than any other class here.

How Venture Funds Use IRR

A venture fund's reported IRR always comes with a qualifier, and two versions of the same fund's number can be far apart. Funds call capital in the early years and distribute it in the later years, and each convention below falls out of that structure.

Gross IRR and Net IRR

Gross IRR measures performance before fees, carried interest and fund expenses come out. Net IRR is what reaches LPs after those deductions, an annual management fee, carried interest and the fund's operating costs. No investor ever receives the gross figure, so net is the number you want when a partner quotes performance.

Realized IRR and Unrealized IRR

Realized IRR uses only cash from exits that already happened. Unrealized IRR is built on current private-company marks for companies still private. Fund reporting splits the same way: distributions to paid-in capital (DPI) covers realized cash alone, and the residual value side is a set of estimates. A young fund's IRR is mostly the unrealized kind, so a striking number in year three or four says more about recent markups than about money anyone has banked.

J-Curve Timing and Recovery

Nearly every fund's net IRR starts negative and then climbs in a J-shaped curve. Management fees hit committed capital from day one while managers still hold the investments at cost, so the fund shows losses before the companies have done anything. The trough typically lasts through a fund's first several years, until markups and early exits pull the line positive. A negative IRR in year two reflects the fee and marking schedule more than the companies inside the fund.

Vintage Years and Peer Benchmarks

LPs compare a fund only against funds that started deploying the same year, because vintage sets entry prices, exit windows and the macro backdrop a manager had to work with. Two funds run by equally capable teams can post widely different numbers.

In the first half of 2025, returns by key vintage ranged from negative 2.5 percent for 2015 to positive 8.6 percent for 2022. Entry prices and market conditions typically explain as much of a spread like that as manager skill does, so reading one vintage against another compares environments more than investors.

How Investor IRR Targets Shape Your Raise

A fund's IRR pressure is visible before you sign a term sheet, and it shapes how an investor behaves at a board table long before any exit conversation starts. CRV leads seed and Series A rounds and holds board seats at both Mercury and Vercel.

Fund Vintage and Exit Timing

Two partners can offer identical terms and behave differently at the same board table. The partner on a two-year-old fund typically has runway to be patient with you, and the partner on a nine-year-old fund is inside a harvest window. Before signing you can ask about the fund size and vintage, how much it has called and deployed, when the investment period ends and how much remains in follow-on reserves. Public records cover some of that timeline too.

Early Exits and Board Pressure

IRR is a money-weighted return calculation, so a distribution in year three moves a fund's number more than the same distribution in year eight. Managers can improve reported fund IRR by distributing cash sooner. From your board's seat, a quick acquisition offer can look better than the math of waiting, even when waiting builds a bigger company.

A board member whose fund has returned almost nothing to its LPs and needs to raise the next fund is not neutral about your exit timing. In 2024 CRV returned $275 million to its LPs rather than keep deploying a late stage fund at inflated valuations.

Follow-on Rounds and Investor Conviction

An investor's willingness to keep writing checks into your later rounds can indicate conviction in your long-term outcome, though it does not prove a preferred exit timeline. CRV led Mercury's Series A and participated in its Series B, C and D. Capital continuity like that means you are not re-selling existing investors at every round.

The IRR Limits That Distort Returns

A single percentage compresses years of cash flows into one figure, and some of what it leaves out changes the reading. Some of that is mechanical, and some of it reflects choices the manager made. The distortions below are the ones most likely to catch a founder reading a fund's numbers:

• Reinvestment assumption: Comparing investments by IRR assumes interim proceeds earn that same rate again, which overestimates returns once the rate passes anything a fund could realistically reinvest at. High venture IRRs are exactly where the assumption breaks.
• Scale blindness: A 40 percent IRR on a small fund creates less wealth than a 20 percent IRR on billions. Percentages carry no dollar units, so ranking by IRR alone rewards efficiency and ignores magnitude.
• Short holding periods: Annualizing a quick return produces a rate no fund could sustain across a full hold.
• Multiple IRRs: Cash flows that change direction more than once can satisfy the IRR equation at more than one rate. In that case, there is no single true answer.
• Unrealized marks: An impressive IRR in a young fund can come almost entirely from paper valuations. Managers often set those marks from the most recent financing round, not from any sale of shares.

LPs read IRR next to MOIC and DPI for this reason: a multiple restores the dollar size and distributions restore the realized cash.

What IRR Tells You About an Investor's Timeline

IRR measures a fund's return against the time the fund has to earn it. Cash that arrives early counts for more, so a fund's vintage and how much it has deployed tell you how much of that time is left. Founders who ask about both in a first meeting learn years in advance what the pressure at their board table will feel like. A quoted rate only means something with its qualifiers attached, and net is what reaches investors after fees and carried interest. MOIC and DPI fill in what the rate leaves out: the dollar size of the outcome and the cash anyone has banked.

If you're an early stage founder looking for a lead investor whose fund math you can see clearly and who can commit quickly without a committee, reach out to us to see if we'd be a good fit.

Frequently Asked Questions About IRR

What is a good IRR for a venture fund?

A good IRR is whatever clears the same-vintage peer set, since entry prices and exit windows differ by year. The same percentage can be strong for a 2015 fund and weak for a 2021 fund, so a rate quoted without a vintage attached tells you little.

Is a higher IRR always better?

No. Higher rates on a smaller check or a shorter hold can create less wealth than a lower rate on more capital held longer. The rate only means something next to a multiple like MOIC and next to realized distributions.

What is the difference between IRR and XIRR in Excel?

The two functions differ only in how they treat the calendar. Feeding venture cash flows into plain IRR quietly treats a January wire and a December wire as the same period, which distorts the rate. XIRR reads the actual dates, so it is the right default for any private investment.

Can IRR be negative?

Yes. An IRR can be below zero when an investment loses value during the measurement period. Within venture funds, a negative IRR during the first few years usually comes from fees and conservative marks working through the J-curve.