The internal rate of return (IRR) is a financial metric used in the context of venture capital to estimate the profitability of a fund. It represents the annualized rate of return at which the net present value (NPV) of all future cash flows (both inflows and outflows) from a venture capital fund equals zero.
For example, a private equity fund that invested $5 million and returned $18 million to investors over 6 years achieved an IRR of approximately 23% — exceeding the fund's 20% target hurdle rate, which triggers performance fees for the fund managers.
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