Internal Rate of Return (IRR): Formula, Examples, Benchmarks

Internal rate of return (IRR) is the annual rate at which the net present value of all of an investment's cash flows (money in and money out) equals zero. Because it accounts for when cash moves, IRR lets you compare investments of different sizes and timelines on one percentage basis and test whether a return beats your hurdle rate.

Definition: IRR is the discount rate r that solves 0 = CF0 + CF1/(1+r) + CF2/(1+r)^2 + ... + CFn/(1+r)^n, where each CF is a cash flow (negative for money invested, positive for money received).

What internal rate of return means and why investors use it

A multiple tells you how much money you made. IRR tells you how fast you made it.

That matters because capital tied up for ten years can't be put to work anywhere else. A 3x that takes a decade and a 3x that takes three years are very different results, even though the multiple looks the same.

Carta describes IRR as the break-even rate at which the net present value of all future cash flows equals zero. Investors and operators use it in:

• Venture capital: measuring deal and fund returns over a ten-year-plus fund life.
• Private equity: evaluating buyouts where timing of the exit drives returns.
• Real estate: combining rental income and sale proceeds into one annual rate.
• Company decisions: comparing projects, such as building a new product line or buying equipment.

As a rule of thumb, if the IRR exceeds your cost of capital or hurdle rate, the investment clears the bar.

How to calculate internal rate of return, with worked examples

Most cash flow patterns have no closed-form solution, so spreadsheets solve IRR by trial and error (iteration). The examples below are illustrative.

Example 1: a single venture exit. A fund invests $500K in a startup and receives $5M five years later. That's a 10x multiple. IRR = 10^(1/5) minus 1, or about 58.5 percent per year.

Example 2: a follow-on investment. A fund invests $1M at year 0 and another $500K at year 1, then receives $4M at year 5. The cash flows are -1,000,000; -500,000; 0; 0; 0; 4,000,000. The IRR is about 23.3 percent, even though the multiple is 2.7x.

Example 3: real estate with income. An investor buys a property for $250K, collects $15K of net rent each year for seven years, and sells for $600K at the end of year seven. The IRR is about 17.7 percent. Without the rental income, the same purchase and sale would produce about 13.3 percent.

Example 4: why time matters. A 3x return in three years is an IRR of about 44.2 percent. The same 3x over eight years is about 14.7 percent. Same multiple, a third of the annual rate.

Spreadsheet functions

• IRR: =IRR(values, [guess]) in Excel and Google Sheets assumes equal periods between cash flows. According to Google's documentation, the values need at least one negative and one positive number, and the guess defaults to 10 percent.
• XIRR: =XIRR(values, dates, [guess]) handles cash flows on irregular dates, which is how real investments behave. Microsoft notes that XIRR discounts on a 365-day year and returns a #NUM! error if it cannot converge.
• Fund software: fund administration and cap table platforms calculate IRR automatically from recorded capital calls and distributions.

Bad inputs give you a precise-looking wrong answer. Check every amount, sign and date before you trust the output.

Gross IRR vs. net IRR

• Gross IRR measures the return on the portfolio itself, before fees and carried interest. It reflects the fund manager's investment skill.
• Net IRR is what limited partners actually earn after management fees, fund expenses and carried interest.

Carta draws the same distinction. When a fund pitches you, ask for both, and focus on net. For how fees and carry create the gap, see venture capital management fees and carried interest.

What is a good IRR? Venture capital benchmarks for 2026

A "good" IRR depends on risk, asset class and time horizon. And targets aren't results.

• Targets. Carta's IRR guide says many early-stage VC investors target a 30 percent net IRR, while later-stage VC and growth equity investors target around 20 percent. These are goals set when a fund is raised, not typical outcomes.
• Fund-level reality. Carta's VC Fund Performance report for Q1 2026, covering 2,775 venture funds, found that for every vintage from 2017 through 2024 except 2021, the 90th percentile net IRR was above 20 percent, while the 75th percentile was not above 15.5 percent in any of those vintages.
• Index returns. Cambridge Associates' benchmark commentary for calendar year 2025 reports that its US Venture Capital Index returned 21.1 percent for the year, measured as a pooled IRR net of fees, expenses and carried interest. A single strong year says little about any one fund.

Put those side by side and the gap is plain. Pitch decks aim for 30. By Carta's data, a fund delivering a net IRR in the high teens is already ahead of most of its peers.

Our view: compare a fund against others of the same vintage year. Anything else mixes up skill with timing.

IRR vs. ROI and other return metrics

ROI (or a multiple such as MOIC) shows the total gain relative to what you put in, but ignores time. IRR accounts for time, which often makes it more useful for staggered or long-dated investments. Funds usually report IRR alongside TVPI (total value to paid-in capital) and DPI (distributions to paid-in capital), because each answers a different question. The fund performance metrics guide walks through all four.

"IRR is the one number that matters"

It's easy to see why people think so. IRR is time-aware, comparable across deals, and it's the number LPs and benchmark providers quote first.

But it's also the easiest one to flatter. Here are the traps we'd watch for:

1. Treating IRR as cash in hand. A 58 percent IRR on a small check held briefly can return fewer dollars than a 20 percent IRR on a large check held for years. Pair IRR with a multiple.
2. Trusting early fund IRRs. In a young fund, IRR is driven by unrealized marks and can swing widely until real exits happen.
3. Ignoring timing tricks. Delaying capital calls, for example with a credit line, shortens the measured holding period and can raise IRR without creating more profit.
4. Using IRR with irregular dates. XIRR is usually the better fit when cash flows are not evenly spaced.
5. Unusual cash flow patterns. When cash flows switch between negative and positive more than once, there can be more than one mathematical IRR. A cross-check with NPV can help.
6. Assuming reinvestment at the IRR. The metric implicitly assumes interim cash can be reinvested at the same rate, which is rarely true for very high IRRs.

Where we land: IRR is essential, and it's not enough on its own. Read it next to DPI. The first tells you the speed. The second tells you whether any money actually came home.

How founders and new investors can use IRR

For founders: many investors think in IRR and multiples, so it helps to know what your exit timeline implies for them. A 10x outcome in four years is an IRR of about 77.8 percent; the same 10x in eight years is about 33.4 percent. That gap is one reason timing matters so much to a fund, and why your board may care about the year of an exit, not just the price. The exit multiple guide shows the related math.

For aspiring investors: IRR, TVPI and DPI are the vocabulary of LP reporting, and they read differently once you've watched a real position age. 1752vc's Venture Fellow program spends eight weeks of live virtual sessions on case studies and diligence on live companies, which is where a hold period stops being a cell in a model and becomes an argument.

The bottom line

IRR answers one question well: how fast did the money grow? It doesn't tell you how much came back, or whether the clock was nudged along the way.

Use it, compare it by vintage, and keep a multiple beside it.

A multiple counts the money. IRR counts the years it took.

Key takeaways

• IRR is the annualized discount rate at which the net present value of all cash flows equals zero.
• XIRR in Excel or Google Sheets suits cash flows that fall on irregular dates.
• Net IRR, after fees and carry, is the figure limited partners actually earn.
• Carta's Q1 2026 data shows top-decile funds in most 2017 to 2024 vintages above a 20 percent net IRR while the 75th percentile stays at or below 15.5 percent, so targets and results differ.
• In our view, IRR reads best alongside a multiple such as TVPI or DPI, because IRR alone can flatter short, small wins.

Frequently asked questions

What is internal rate of return (IRR) in simple terms?

Internal rate of return (IRR) is the yearly growth rate that makes the money you put into an investment and the money you get out of it balance in present-value terms. It turns a set of dated cash flows into one annual percentage, so you can compare investments that differ in size and timing.

How do you calculate IRR in Excel?

Enter cash flows in a column, with investments as negative numbers and returns as positive numbers, then use =IRR(range) for evenly spaced periods. If the cash flows occur on specific dates, list the dates in a second column and use =XIRR(values, dates). Microsoft notes that XIRR returns a #NUM! error if it cannot find a result after 100 tries.

What is the difference between IRR and ROI?

ROI measures the total return relative to the amount invested and ignores how long it took. IRR converts the return into an annual rate that accounts for the timing of every cash flow. Two investments with the same ROI can have very different IRRs, as a 3x over three years (about 44 percent) versus eight years (about 15 percent) shows.

What is the difference between gross IRR and net IRR?

Gross IRR measures investment performance before management fees, fund expenses and carried interest, so it reflects the manager's deal results. Net IRR is what limited partners actually earn after those costs. Net IRR is lower, and it is the figure LPs and benchmark providers such as Cambridge Associates use to compare funds.

Is a higher IRR always better?

Not necessarily. A high IRR on a small check held briefly can return fewer dollars than a lower IRR on a large check held for years, and IRR can be inflated by delayed capital calls or unrealized valuations. It often helps to pair IRR with multiples such as TVPI and DPI, and to check how much cash has actually been distributed.

Sources

• Carta: What is IRR? Internal Rate of Return in Private Funds
• Carta: VC Fund Performance, Q1 2026
• Microsoft Support: XIRR function
• Google Docs Editors Help: IRR function
• Cambridge Associates: US PE/VC Benchmark Commentary, Calendar Year 2025