Money-weighted return, also called internal rate of return (IRR), is a performance metric that accounts for both the size and timing of your cash flows. If you invest $100,000 today versus $100,000 two years from now, those investments have different impacts on your overall returns. Money-weighted return calculates your true annual percentage gain by factoring in exactly when you deployed each dollar, making it far more accurate than simple return calculations for investors with irregular investment patterns.
How It Works
Money-weighted return solves a real problem: time-weighted returns can mislead you about your actual performance. Imagine you invest $1 million in January and the fund gains 10% by December. You earned $100,000. But if you invested that same $1 million in November instead, you'd have earned roughly $8,300 on the same 10% gain. Money-weighted return captures this difference by calculating the discount rate that makes the present value of all your cash flows (both in and out) equal to zero. The resulting percentage is your IRR—your true annual return considering your specific investment timeline.
Why It Matters for Investors
For angel investors, money-weighted return is critical because you rarely deploy capital all at once. You might invest in Company A in 2020, Company B in 2022, and Company C in 2023, with exits happening at different times. Money-weighted return shows your actual performance across this staggered portfolio. It also helps you compare yourself fairly to other investors and fund managers who invest on different schedules. When evaluating your angel track record, money-weighted return gives you and potential LPs an honest picture of whether your capital allocation decisions—not just your stock picks—created value.
Example
You invest $250,000 in a startup in January 2021. In January 2022, you invest another $250,000 in a different startup. The first company returns $750,000 in January 2023. The second returns $600,000 in January 2024. Your total return is $900,000 on $500,000 invested (80% gain), but the timing matters. The first investment had three years to compound, the second only two. Money-weighted return calculates that your actual IRR across both investments was approximately 35% annually, reflecting that your capital deployed at different times and generated returns at different rates.
Key Takeaways
- Money-weighted return (IRR) accounts for both how much you invested and when you invested it
- It's more accurate than simple return percentages for portfolios with irregular funding
- Essential for angel investors comparing performance across multiple deals with staggered exits
- Helps you assess whether your capital allocation decisions created real value for LPs