The City of Denver and the DEMI Fund were trying to do something innovative — take marijuana sales tax revenues and invest them in early-stage companies owned by minority and women entrepreneurs.

But the marriage between public mission and private equity proved a rocky one, resulting in a lawsuit in March and now a legal separation.

“Creating something new is not easy, and we appreciate the collaboration and creativity of DEMI Fund, Denver Economic Development & Opportunity, and other partners for their efforts,” the city said in a statement announcing an agreement to end a lawsuit between the two sides.

Following the George Floyd protests, the administration of Mayor Michael Hancock created a venture capital fund to assist businesses from disadvantaged communities who historically have had a harder time accessing the financing they need to grow.

The funding source for the Herman Malone Fund was unprecedented, a 1% sales tax the city was collecting on marijuana sales. It was expected to generate $15 million a year between mid-2022 and mid-2025.

The fund was also groundbreaking in another way — allowing Denver and its taxpayers to be venture capitalists and share in the potential upside of a self-replenishing private equity fund.

DEDO hired Danielle Shoots and her New Community Transformation Fund – Denver, later renamed the Domestic Emerging Market Investments Fund or DEMI Fund, to oversee the city’s contributions. Beyond that, DEMI was to provide coaching and other services to help entrepreneurs succeed.

The relationship soured after Shoots said she pushed back against what she considered city requests to hire unnecessary subcontractors. By last November, the flow of funds dried up under the administration of incoming Mayor Mike Johnston.

Shoots filed a lawsuit in March alleging that the city failed to pay $800,000 in expenses DEMI had incurred. She also alleged the city only provided $6.9 million of the $15 million stated under the contract’s first year, a shortfall the city blamed on weaker-than-expected cannabis sales.

Under the agreement, announced Friday, Denver will pay outstanding invoices, DEMI will continue to support the companies it has already funded and it can invest what is left in the Herman Malone Fund. That amount was not disclosed.

DEMI in return will drop its lawsuit and release Denver from its contract, which extended through June 2025 and would have required another $15 million in contributions in the upcoming fiscal year.

“While we by no means are pleased with the reason that the lawsuit was filed in the first place, including having unpaid expenses, we are moving forward to continue the mission at hand,” said Mark Goodman, a managing partner at DEMI who took over after Shields stepped down from that role in April.

Goodman said DEMI closed its first fund at just under $50 million, an amount that includes contributions from other limited partners besides the City of Denver.

Although Shields no longer has the lead role, she remains actively involved in the fund and provides strategic guidance, Goodman said, adding the fund remains focused on helping its portfolio companies succeed.

“All investments don’t work out and our goal is to make as many of the investments as you can work out. This is an important answer to a systemic problem that hasn’t gone away,” he said.

In its statement, Denver said its goal with the Herman Malone Fund will remain the same as before — “supporting minority- and women-owned businesses to further economic opportunity and access to resources.”

Additional information about new programs at the fund are pending, the city said.

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