Internal Rate of Return (IRR) Calculator
Measure the profitability of potential startup investments. Compare returns across different exit scenarios and time horizons.
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Understanding IRR
The Internal Rate of Return (IRR) is the annual growth rate that makes the Net Present Value (NPV) of all cash flows (both positive and negative) from a particular investment equal to zero.
1. Key Formula
0 = Sum( Cash Flow / (1 + IRR)^t )
Where 't' is the time period in years. This equation is solved iteratively.
2. Multiple on Invested Capital (MOIC)
MOIC = Total Cash Returned / Total Cash Invested
3. Net Profit
Net Profit = Total Cash Returned - Total Cash Invested
Frequently Asked Questions
Why is IRR important for VCs?
VCs have a limited time horizon (usually 10 years) to return capital to their Limited Partners (LPs). IRR accounts for the time value of money—receiving 3x your money in 3 years (high IRR) is much better than receiving 3x in 10 years (lower IRR).
How does IRR differ from MOIC?
MOIC (Multiple on Invested Capital) tells you how many times your money you made back (e.g., 3x), ignoring time. IRR tells you the annualized speed of that return. A quick 2x exit might have a higher IRR than a slow 10x exit, though VCs generally aim for high multiples first.
What is a good IRR for VC investments?
Top-quartile VC funds typically target a net IRR of 20-30%+. However, individual successful startup investments often need to generate IRRs of 50-100%+ to make up for the inevitable failures in the portfolio.
How do follow-on rounds affect IRR?
Investing more capital in later years (follow-on) generally lowers the IRR because that capital has less time to compound, but it can increase the total Net Profit (cash) if the company continues to grow. This is the trade-off between "velocity" of money and "mass" of money.