Venture capital fund DEMI sues Denver for breach of contract

A venture capital fund hired by the city to invest in minority- and women-owned businesses is suing the city for failing to provide $15 million in promised funding. (AP Photo/David Zarbowski)

An equity venture capital fund that invests in minority- and women-owned businesses has sued Denver, accusing the city of violating a contract to cut off funding and put disadvantaged businesses at risk.

“We don’t have nearly $800,000 of our own money to pay other subcontractors,” said Daniel Schutz, managing director and founder of Denver-based Domestic Emerging Markets Investment (DEMI Fund). “We need to get paid to continue our collective work.”

In October 2022, the City of Denver created the Herman Malone Fund using revenue from a 1% tax on marijuana sales. The fund was dedicated to investing in and supporting Black, Indigenous, people of color or BIPOC entrepreneurs.

In October 2022, after issuing a request for proposals, the Denver Office of Economic Development and Opportunity hired the New Communities Transformation Fund, doing business as DEMI and led by Schutz, former chief financial officer of Colorado Trust. In the deal, the city will provide $15.2 million through June 2025, on top of $9 million in shoots raised from other investors including Xcel Energy, Bank of America and the Colorado Housing Finance Agency. I promised.

The goal was to initially support 1,000 underprivileged businesses and eventually double the size of the fund through return of capital from Denver and future renewals, creating a self-sustaining capital pool.

In addition to finding and investing in eligible companies to support, DEMI was tasked with providing mentoring and support services through nonprofit organizations and subcontractors.

But the city’s involvement was complicated from the beginning. As a public entity, Denver could not act as a limited partner in a venture capital fund because it would put taxpayer funds at risk. As a result, Chute was forced to take a workaround in which the city of Denver directed the funds to the nonprofit organization Impact Charitable through a donor-advised fund. Impact Charitable became a limited partner and remained compliant with securities laws.

Although this is a step away from the typically passive role of limited partners, DEDO has begun hiring what Shute described as “unnecessary” contractors, freeing up funds that could be used to support the company. reduced. In one case, DEDO asked his DEMI to hire a Houston-based subcontractor, but Schutes refused.

She argued that supporting the out-of-state company violated the terms of the contract and was a fraudulent use of Denver tax dollars. She filed a public records request with the city and learned the person in question was a relative of a city employee.

After the standoff, Schutz said, the city stopped disbursing capital funds and reimbursing expenses due to lack of documentation, even though each invoice had hundreds of pages of documentation attached. .

Schutes said she had hoped Mayor Michael Johnston would respect the policy, but was told the Herman Malone Foundation had run out of money. Cannabis sales are down, but the city has yet to explain why the fund is underfunded.