Question 1

What is Internal Rate of Return (IRR)?

Accepted Answer

IRR is the annualized rate of return that makes the Net Present Value (NPV) of all cash flows equal to zero. It accounts for the time value of money, making it superior to simple return calculations. An IRR of 25% means your investment compounds at 25% annually. IRR is the standard metric for comparing investments with different timeframes and cash flow patterns.

Question 2

What is a good IRR for different investment types?

Accepted Answer

Target IRRs vary by asset class: Venture Capital 25-35% (compensating for high failure rates), Growth Equity 20-30%, Private Equity (buyouts) 15-25%, Real Estate 10-18%, and Public Markets 8-12%. Early-stage VC funds target even higher — 30%+ net IRR — because only a few investments in the portfolio will succeed.

Question 3

What is MOIC and how does it differ from IRR?

Accepted Answer

MOIC (Multiple on Invested Capital) = Total Returns / Total Invested. A $500K investment returning $2.5M has a 5.0x MOIC. Unlike IRR, MOIC ignores time — a 5x return in 3 years is much better than 5x in 10 years. Use both metrics together: MOIC shows magnitude of return, IRR shows time-adjusted efficiency. A 3x MOIC in 5 years ≈ 24.6% IRR.

Question 4

How do management fees and carry affect returns?

Accepted Answer

Management fees (typically 2% of committed capital annually) reduce the capital available for investment and lower net returns. Carried interest (typically 20% of profits) reduces investor returns by sharing profits with fund managers. A "2 and 20" fund structure on a $10M investment with $25M exit over 5 years: $1M in mgmt fees + $2.8M carry = $3.8M in total fees, reducing investor net return significantly.

Question 5

What is NPV and when should I use it vs IRR?

Accepted Answer

NPV (Net Present Value) discounts all future cash flows to today's value at a chosen discount rate. A positive NPV means the investment exceeds your required return. Use NPV to decide whether to invest (positive = yes). Use IRR to compare between investments. NPV is generally more reliable because it avoids IRR's issues with multiple sign changes in cash flows.

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Frequently Asked Questions

What is Internal Rate of Return (IRR)?

What is a good IRR for different investment types?

What is MOIC and how does it differ from IRR?

How do management fees and carry affect returns?

What is NPV and when should I use it vs IRR?

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Frequently Asked Questions

What is Internal Rate of Return (IRR)?

What is a good IRR for different investment types?

What is MOIC and how does it differ from IRR?

How do management fees and carry affect returns?

What is NPV and when should I use it vs IRR?

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