Internal rate of return (IRR) expresses investment performance as an annual compounding rate, accounting for exactly *when* money went in and came out. It is one of the two numbers every venture fund reports to its investors, alongside multiples like MOIC.
Why time-weighting matters
Doubling your money is a 2.0x multiple whether it took two years or ten — but it is roughly a 41% IRR in the first case and 7% in the second. IRR is what lets an investor compare a fast 2x against a slow 3x, or against simply holding the S&P 500.
Benchmarks in venture
- Top-quartile venture funds have historically targeted net IRRs of 20%–30%+
- The long-run public-market alternative returns roughly 10% annually, so a venture fund needs a meaningful premium to justify its illiquidity and risk
- Early in a fund's life IRR is nearly meaningless — the J-curve effect means fees and markdowns dominate before winners mature, which is why funds younger than four or five years are judged cautiously
How IRR gets flattered
IRR is the most gameable headline number in private markets. The classic techniques: using subscription credit lines to delay capital calls (money deployed later = higher rate), marking portfolios up on recent hot rounds, and quoting *gross* IRR (before fees) where *net* is what LPs actually receive. Sophisticated LPs read IRR only alongside DPI — cash actually distributed — on the theory that you cannot spend an interim IRR.
For angel investors
Individual angels can compute a personal IRR across their portfolio using a spreadsheet XIRR function over dated cash flows. Most angel portfolios show negative IRR for years — the failures die fast, the winners take a decade — which is precisely why the discipline of portfolio-level tracking, rather than anecdote-level memory, separates professional angels from lottery players.