IRR

IRR stands for Internal Rate of Return. It is the annualised rate at which an investment grows from the day money goes in to the day it comes out. Unlike simple return (which ignores time), IRR accounts for when cash flows happen.

If you invest ₹1 crore in Year 1 and get back ₹3 crore in Year 4, your simple return is 200%. Your IRR is lower—roughly 32% per year—because your money was tied up for three years. IRR is calculated by solving for the discount rate that makes the net present value of all cash flows equal to zero.

In VC, IRR is a primary metric because venture capital is illiquid and takes 7–10 years to mature. A 25% IRR is considered strong for early-stage funds. A 40%+ IRR is exceptional. Most Indian VC funds target 25–35% IRR over a fund lifecycle. IRR lets you compare a quick ₹10 crore exit in Year 3 against a slower ₹50 crore exit in Year 8 on equal footing.

India's VC ecosystem has compressed timelines compared to Silicon Valley. Many Indian startups exit in 5–7 years rather than 10. This means IRR calculations often look back at shorter holding periods. Early-stage funds typically aim for 30%+ IRR to justify risk; growth-stage funds settle for 20–25% as exits are more predictable and capital is cheaper.

SEBI does not mandate specific IRR targets for VC funds, but Limited Partners (LPs)—family offices, pension funds, endowments—use IRR as the primary performance benchmark. The best-performing Indian VC funds (Sequoia India, Accel, Bessemer Venture Partners India) have published IRRs in the 35–50% range across select vintages. However, this skews high because only winning funds report; many smaller or older funds underperform at 10–15% IRR.

Currency fluctuations also affect IRR for foreign LPs. A startup acquired by a US acquirer at $50 million may deliver strong IRR in USD but lower IRR when converted back to INR due to depreciation.