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January 23, 2007


If you don't consider time when looking at either IRRs or multiples, you're making a mistake.

But at least IRR's have meaning without also stating a time frame. You can't say the same thing about multiples. A 100% IRR is good no matter what. Even if it's after a short time period, you still get to reinvest that money. A 10x multiple may or may not be good. Depends on how long it took.

When given a multiple, you also need a time period to make sense of it. (i.e. so that you can calculate an IRR...)

You could say that for VC, there is an implied time frame. True. But I'd bet that over 90% of those business school pitches involved IRRs over a 5 year time frame.

And frankly, its so easy to convert between the two, that I wonder what the fuss is about.

6 or 1/2 dozen. Take your pick.

As you point out, time in this sense doesn't really count for VC's, for a couple of reasons:

(a) You don't get to re-use the capital in the same fund, if you achieve a rapid exit;

(b) The only situations in which you go to raise a new fund early are ones where you've either hit a high multiple on some deals quickly (which speaks for itself without an IRR number) or the market is such that investors are basically begging you to take their money. Either way, an IRR figure adds basically nothing.

I'm sure this came as a (salutory) shock to those calculator-toting MBA students!

It sounds counter-intuitive, but you are right. Because we can't reuse capital (other than some mngt fee rollover), we are focused much more on multiple. In other words, if our best deals are quick 100% IRR's that return 1.8x capital in less than a year, we are in trouble because it won't cover our losers. As a result, this pushes VC's to push for a higher multiple gain over a longer period than a smaller multiple gain in the short term (even if the shorter has a higher IRR). If we could reinvest, while we would still be tempted to push for the high multiple (let the winners run) but you would see more shorter exits.

I guess what I'm saying is this: a multiple and an IRR are precisely the same thing if you know the time (and you do). No big deal.

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