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📰 Today's topic: IRR and capital calls

Recently we talked about different strategies investors can use to bridge the gap between capital calls.

But there's an even bigger question that emerging fund managers need to consider: How can you manage your capital calls to maximize your IRR?

That’s a big question with a lot of technical jargon. Let’s break it down.

Quick refresher: How IRR works

IRR stands for Internal Rate of Return. It measures how much money your fund makes relative to when you invested it.

For an LP, looking at a fund’s IRR is a fairly quick way to gauge how quickly you (the fund manager) are putting their dollars to work AND how quickly you’re getting their money back.

Here's an example: Let's say you invest $1 million in a startup and sell it for $3 million three years later. That's a 3x return and a 44% IRR.

Not bad!

But if that same $1 million investment took 10 years to return $3 million, your IRR drops to just 12%. Same multiple, way worse IRR.

This is why timing matters. The faster you deploy capital and the faster you get returns, the better your IRR looks.

Cash sitting in your bank account earning 0%? That kills your IRR.

LPs use IRR to judge your performance and compare you to other managers. The higher your IRR, the better you look to them.

The problem of calling too much capital

If you’re looking to maximize your IRR (and if you’re a fund manager, this is probably one of your priorities), then you’re going to want to think carefully about how you call down capital from your LPs.

Say you're raising a $10 million fund and you do your first close at $1 million. You decide to call 10% of capital upfront to have plenty of runway.

That's $100,000 in your account.

You can likely deploy $100,000 in investments relatively quickly, right? Things are looking good.

Then you spend the next six months fundraising, and you do a 2nd and final close. Now you’ve raised the full $10 million.

When those new LPs come in, they need to do a catch-up capital call to match your existing 10% level.

That's another $1 million hitting your account all at once.

It’s going to take you a while to deploy $1 million. That cash is going to sit around for a while, earning basically 0% while it waits to be invested.

This is an IRR killer.

A different approach

Instead of getting a big chunk upfront to have plenty of runway, you could try the multiple close approach.

Let's redo our example. Same $10 million fund, but this time you do multiple closes.

You bring in your first $1 million on your first close and do a 1% capital call. You get $100k in the bank, and deploy it.

Next month you bring in another set of investors and close another $1 million. They do a catch-up call and send you another $100k.

You invest it.

You keep pushing forward on this schedule, calling $100k every month or so and deploying it regularly.

No big chunks of money sitting around in your bank account doing nothing.

It will be more work

Let’s be real: doing many closes will require more work.

More closes means more legal docs, more LP communications, and a bigger administrative burden.

You'll need to stay on top of your deployment projections and match them with your fundraising timeline.

But the IRR impact can be huge. And when you’re competing with thousands of micro funds for the same LP dollars, every point matters.

Let’s look at the whole strategy

The best fund managers think about all these pieces together:

Capital calls: Small and frequent, matching deployment needs

Lines of credit: For urgent opportunities between calls

Fundraising closes: Multiple smaller ones throughout the process

Catch-up calls: Steady trickles rather than massive influxes

It's like conducting an orchestra. Each instrument (funding source) comes in at the right time to create something beautiful.

I love a steel drum band, myself -

Kera from Hustle Fund

Who gets paid first when there’s an exit?

Let’s say you invest in a company and three years later, the company gets acquired. This is the moment you’ve been waiting for. Time to realize your investment and claim your share of the profits.

But how can you determine what your proceeds will be? It may not be as simple as the percentage of the company you own.  

Well that seems odd →