What is IRR?
IRR, or internal rate of return, is the annualized return on an investment, which rewards getting money back sooner. Formally, it is the discount rate at which the net present value of all the investment's cash flows equals zero. PE firms use it with MOIC to judge deals. In one survey, PE investors said they targeted an average IRR of 22 percent.
Why it matters to a revenue leader
IRR makes time expensive. Every quarter the exit slips lowers it, which is why sponsors care about the speed of growth as much as its size. For a revenue leader, slow ramps, long sales cycles and delayed price increases cost IRR even when the end result is the same. Plans that show results early in the hold carry extra weight with the board.
How to calculate it
Find the rate r at which the sum of each cash flow ÷ (1 + r)^t equals zero, with the investment entered as a negative cash flow at time zero. Spreadsheets do this with IRR or XIRR.
Common mistake: reading IRR without MOIC, since a quick, small gain can show a high IRR while returning little money.
Example
Fictitious numbersTwo deals each turn $50M into $100M, a MOIC of 2.0x. One exits in three years, an IRR of about 26 percent. The other exits in six years, an IRR of about 12 percent. Same multiple, very different results for the fund.
"Which of our commercial plans pay off early enough in the hold to help IRR?"
Sources
- Internal Rate of Return (IRR) checked 9 Oct 2026
- What Do Private Equity Firms Say They Do? (Gompers, Kaplan and Mukharlyamov, HBS Working Paper 15-081) checked 9 Oct 2026