Early 2022 data shows a drop in median IRR across funds

September 20, 2022
Adam Lewis

In 2021, the U.S. venture capital industry set numerous records, with dealmaking, fundraising, and exit activity reaching all-time highs. As VC firms took portfolio companies public or sold them to strategic acquirers, 10-year net IRR (internal rate of return) for venture funds tended to outpace that of private equity, secondaries, and infrastructure strategies. 

IRR is a formula that gauges investment performance by measuring the profitability of an investment on an annual basis. It is a closely watched metric used for private equity, venture capital, and other alternative investment strategies. And it is no longer on an upward trajectory—at least for VCs. As dealmaking, fundraising, and exit activity have slowed in 2022, median net IRR dropped for VC funds established from 2017 to 2020, according to Carta data. 

Declining IRR across the board 

The chart below shows median net IRR by quarter and fund vintage from 2017 to 2020. While all vintages saw median net IRR decline, 2017 and 2020 vintages saw the sharpest drops (of 3.6% and 3.0%, respectively). The lone exception to the decline was 2021 vintage funds, which are still rising from the dip below zero that private-fund IRR usually takes in the initial stages of the fund lifecycle. IRR typically drops when general partners begin making investments during the first year of a fund’s lifecycle, then begins ticking up as investments begin returning capital to shareholders, forming what investors call a J-curve.


Chart for median Net IRR by quarter and vintage year, showing a decline for most fund vintages in H1 2022.

Most fund vintages on Carta saw a decline in median net IRR in H1 2022.

During the first half of 2022, the tech-heavy NASDAQ fell more than 30%, reflecting the collective drop in market cap for publicly-listed tech companies. VC fund median net IRR, which measures returns rather than valuations, dropped at a less dramatic clip. That could be in part because many startups have avoided pricing new rounds and holding liquidity events in hopes of waiting out the unfavorable macroeconomic conditions. Meanwhile, VCs have held off on marking down their own portfolios, creating a lag effect compared to public market competitors. Early-stage VCs also aren’t as closely tied to public market performance as other investment strategies, because their portfolio companies are at least three to five years away from going public. 

A closer look at 2018 VC funds  

A decline in IRR is no fun for any fund manager, but it’s especially painful for funds in the middle or late stages of a lifecycle (which is typically 10 years). This is usually the period when general partners (GPs) are able to start cashing in on their initial investments: After three to five years of growing their fund’s portfolio, the GPs begin exploring opportunities to sell assets, as portfolio companies elect to go public, run a secondary transaction, or sell to either a public or private acquirer (like a private equity firm or a corporation with a flush balance sheet). A profitable sale causes the IRR to spike, creating a line up and to the right that forms the spine of the J.


Median net IRR for 2018 vintage VC funds, showing a 0.7% decline from Q4 2021 to Q2 2022.

Median IRR for the 2018 vintage of VC funds on Carta has fallen by 0.7% since Q4 2021.

Funds in the 2018 vintage are in the middle of their lifecycle. Their median IRR had formed a J curve until the first six months of 2022, when economic headwinds depressed startup valuations and attractive exit options dwindled. Median net IRR peaked at 11.7% in the fourth quarter of 2021, then declined to 11% by the end of June—causing the J-curve to jag downwards.

Why IRR is important to GPs and LPs

VCs use IRR to gauge the financial performance for a company or a fund. LPs use it to help determine whether a VC is worthy of their money when GPs return to the fundraising trail. 

IRR is also important to LPs because it helps determine the return on their initial investment—they can use it to compare private investment strategies against each other. For early-stage investors, most expect an annual net IRR of around 20-30%, depending on their stage of investments—a threshold many VCs have had no problem reaching over the past half-decade. For late-stage investors, the expected IRR benchmark is closer to 20%. It would take a sustained increase in performance for the 2018 vintage to move into the low end of that range.  

Other fund metrics

IRR isn’t the only measure used by VCs to evaluate fund performance. After all, it’s not a perfect measurement. VC and PE firms will often use a capital call line of credit, which is basically a short-term loan, so they can make deals without calling money immediately from their LPs. Doing so cuts down on the amount of time the GP holds their LPs’ money and temporarily inflates their IRR. 

The good news for LPs: There are plenty of other ways to measure fund performance, including TVPI, RVPI and DPI, among other formulas. TVPI provides a ratio of a fund’s total gain, RVPI measures a fund’s unrealized value, and DPI provides a ratio that reflects funds paid in by LPs compared to funds distributed.  

Sign up for more insights

Carta plans to launch a fund benchmarking report in the first half of 2023, where we’ll take a closer look at other benchmarking data for funds on Carta.  

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Carta calculates IRR in a uniform fashion for funds under administration. The IRR data reported here reflects a snapshot of fund IRR for the period concluding on June 30, 2022. Historical IRR may fluctuate in future reports due to administrative lags in recording transaction data. 

The data set includes 3023 of the approximately 4500 fund entities that Carta administers; it includes SPVs, but excludes any entities that have not yet recorded returns.


DISCLOSURE: This communication is on behalf of eShares Inc., d/b/a Carta Inc. (“Carta”).  This communication is for informational purposes only, and contains general information only.  Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.  This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. ©2022 eShares Inc., d/b/a Carta Inc. (“Carta”). All rights reserved. Reproduction prohibited.