4-1-24 *INTERVIEW* Danielle Shoots Founder of DEMI is Suing Denver for Financial Mismanagement

Episode Transcript

(00:00):
I have mentioned this a time ortwo on the show. Last week a
story that I really want to tryto get to the bottom of, and
it revolves around an investment fund calledDEMI DEMI. It was originally called the
New Community Transformation Fund. It's runby Danielle Shoots, and DEMI has had

(00:24):
a partnership with the City and Countyof Denver for funding certain projects. And
rather than my trying to describe what'shappened at this point, I'm going to
let Danielle do it. Danielle Shootshis managing director and founder of DEMI Fund.
Danielle, Welcome to KOWA, Thanksfor being here, Thanks for having
me. So headline at the DenverPost taxpayer returns unclear as venture capital firm

(00:49):
DEMI sues Denver seeking funds, andthere's more headlines like that. So what
is going on between you and Denver? Then we'll maybe get to the business
side a little bit later. Whatis going on between you and Denver?
What was the deal? What seemsto have happened since then? Where are
you suing the City and County ofDenver. Yeah, so we're a pretty

(01:10):
traditional venture capital fund and we havean agreement with the City and County of
Denver for a contract. Part ofthat contract we will invest through the Venture
Capital Fund, and the rest ofthe contract was for ecosystems support, so
all kinds of things to support smallbusinesses, for underinvested in, underrepresented business

(01:32):
owners, so women and people ofcolor and veterans, was our deal with
the city. So they're one ofmany many investors in my fund and we
had a special deal with them,and it's been a very difficult partnership,
but finally it has come to apoint where in November of last year,
we were told that the account thatwas set aside for this partnership and this

(01:55):
contract, which was originally fifteen milliondollars over three years, only had eight
thousand dollars left in it. Andwe have tried everything in our power to
get the city to tell us wherethat money went. They haven't. They
just stopped saying our invoices as theresult with the city, and we just
don't know. And so we finallyhad to file a lawsuit over several several

(02:19):
issues that have been happening with thatcontract almost since its construction. Okay,
so let me just restate that andtell me if I have it, if
I have it right. So I'ma fairly experienced, although small scale venture
capital investor myself, and from timeto time, it's unusual, but from
time to time I will get involvedin a structure where you make a commitment.

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So rather than sending in one hundredthousand dollars, you say, I'm
good for one hundred thousand dollars overthe course of a couple of years,
let's say, and you just tellme when you need the money, and
then as they find things to investin, they'll say, okay, we
need seventeen thousand dollars by next andthen I send them that and then I
only am on the hook for anothereighty three thousand. So is that the

(03:05):
structure of your deal with with Genver? That's exactly right. It's a limited
partnership, right, So the investoris a limited partner. They've committed amount
of capital, and I, asthe general partner, yeah, make investments.
They have to sort of stay silentand hands off, okay. With
the city and Pounary of Denver.We put that mechanism through a third party
called Impact Charitable. So it wasa very cool structure because now I can

(03:30):
do the returns right back into ImpactCharitable, which is a donor advice fund
set up on behalf of the taxpayers. So Denver was not a direct
LP. They told me they couldn'tbe a direct LP, so we solved.
What we were trying to do iscreate an evergreen fund for taxpayers without
them having to pay more money.So this was this amazing innovative approach to

(03:51):
using venture to grow and scale underinvestedin companies, but also making sure that
you know, returns were going backto tax payers and not me as a
fund manager, and not even thedepartment because we're not supposed to do that.
So the tax players itself would havea donor advice fund setup that the
city could direct for reinvestment. That'sfascinating. Yeah, that's I want to

(04:11):
get back to the legal issues ina second, but let me just stick
with that because it's it's super interesting. So again to try to rephrase,
and you tell me if I'm understanding. So Denver either directly Denver funds something
that then funds you. And yourconcept is you invest in a bunch of
small companies, businesses, and thereturns that you get from those investments then

(04:38):
themselves get funneled back into more eithernonprofit kinds of investments or just nonprofit stuff
generally for Denver, and it becomesa you know, perpetual motion machine in
a way. Yep. Evergreen Fund, you know, was the goal there.
So you know, I don't knowanother city that did it this way,
and we really solved for it.I was so excited about it to

(04:59):
be the first city in the countryto do it. And so they did
a contract with the General Partnership andthen a subcontract with Impact Charitable, who's
the investor on behalf of the donoradvice on set up by the city.
Okay, So the city commits tofifteen million dollars over a period of time,
they send you what six or sevenmillion? Is that what you said?
Yeah, seven million in total,including all types of nonprofit support,

(05:24):
accelerators and other ecosystem work. Andthen some of that money is invested in
and through the fund through company.Okay, And the fifteen million dollars in
total, was that at least theoreticallyor actually deposited somewhere before you started making
your capital calls against it? So, in other words, did you know

(05:46):
at some point that there was fifteenmillion dollars in cash in place somewhere or
was it just a like a promisedcommitment, like we'll find the money somewhere
when you need it. So it'sa it's a special revenue account, so
it is a very specific account withingovernment that gets set up that cannot be
used for anything else. And it'sone percent of marijuana sales tax revenue starting

(06:10):
in twenty twenty two, So theyget the deposit of marijuana sales tax revenue
from the previous year on January secondas well, we're told. And so
by the time they told us therewas no money in the account, there
should have been another three and ahalf million dollars in the account. That's
what was in the city council budgetthey presented the same month. But then
they told us there was no cash. Is it possible that marijuana revenues dropped

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so much that they're just there wasn'tmoney there, or even if marijuana revenues
had dropped a lot, there stillshould have been money there, but just
less since you're getting a straight percentageof the revenue, Like I don't know,
if the city gets the first xmillion dollars and then you get what's
left after that, or if youget a percentage no matter how much they
bring in. Yeah, I geta percentage no matter how much they bring

(06:57):
in into the special revenue account,not my coun right account. And then
and then we brought that down throughinvoicing and work and all of that time.
And so we know that there shouldhave been at least because this is
what was presented to city council,there should have been at least ten million
dollars that was already the positive intothe special revenue account, plus moll forward.

(07:20):
And we got a note in Novemberafter six point nine was spent saying
it was gone okay, And howlarge are the bruises on your forehead from
banging your head against the wall tryingto get answers from the city. I'll
say this, I've had a hugecareer and I've been so fortunate, and

(07:44):
I've been through a lot of hardthings in my career, and this is
the hardest thing I've ever been toin my life because it's it's it's grief,
right. I love this city.I grew up here, I went
to see Denver. My work hasbeen the same about growing this city's economy
since I started. I was afirst CFO job was at the State Health
Department here in Colorado. So it'sbeen brutal. I'm not gonna lie.

(08:09):
It's almost easier on this side ofit. Now. We just had to
file the lawsuit and we're going togo fight it in court, and we
know that we're on the right sideof this. But I wanted it to
work, and so the bruises arethe bruises are many. We're talking with
daniel Shoots. She's the managing directorand founder of the Demi Fund d EMI,
which is suing the City and Countyof Denver for non performance on the

(08:31):
contract where Denver is committed to fundingfifteen million dollars and only came up with
less than half and they are nowsaying they're out of money. So,
Danielle, I'm going to ask youto speculate a little bit. Do you
suspect mismanagement, fraud? Lies?I mean, this is a this is
a lot of money, and it'sin a kind of structure which, as

(08:52):
you describe it, there shouldn't bea lot of wiggle room for the money
not to be there. So whatdo you suspect is going on? Well,
I know for sure about some thatgot allocated to something else that was
not in a line item. They'vetold me that about five hundred thousand.
The rest of it, I haveno idea, no core requests that's been

(09:13):
done by me, my attorneys areeven I'm hearing journalists getting like the actual
transactions into that special revenue account andthen out. So initially I just thought
people didn't realize that you can't movethat money. But you know, so
it's sort of just not competent inhow everything's supposed to work. But as
it's gone on, started to say, well, you didn't reconcile things,

(09:37):
Danielle. Oh, Danielle, youdidn't do this, Danielle. They've now
publicly said that. So now there'slying happening on top of what could have
been incompetence. Now it feels likethere's a cover up and there's defamation happening
to me. And I'm in thefinancial industry, Like, you can't say
I didn't reconcile some this yeah harmmy career, my livelihood for the rest

(09:58):
of my life. Well, youhad to know that once once they screwed
up, whether it was intentionally orunintentionally, I think you had to know
given that the other side is governmentthat you were going to get a barrage
of lies coming at you. Itwas inevitable. Yeah, yeah, I
think I think I was even alittle shocked though, to be honest,
I'm just like, because it's notsmart, right, It's like, now

(10:18):
you're now putting the tax payers onthe hook for way more than what the
contract would have been by not justsitting down with me and saying, hey,
like, we don't know, we'regoing to figure it out. We're
going to get you paid. Youknow. Yeah, I've outlaid my own
cash now. And so instead ofdoing that, they've said, oh,
well, she just she didn't reconcilesomething. She did something wrong. When
I have access to this much moneyand being able to raise money as my

(10:41):
livelihood and the damaged that already significantly, So are you suing for that as
well? Are you suing for theequivalent of defamation or whatever that proper term
would be in your situation, bein addition to or separate from performance on
the contract. So originally we hadsaid I just need to be I need
to be apologized to, and Iwant an audit of the department. That's

(11:05):
all we wanted, and then wewould have just moved on with our lives.
Unfortunately, and now that hasn't happened. It's gone on for a month,
and the decimation has now become public. They've made public statements of me
not reconciling money. I was goingto leave it alone until that happened.
So they made a public statement usingnumbers that aren't even real. They basically

(11:26):
said Danielle can't balance did they basicallysay Danielle can't balance the funds checkbook?
Correct? That seems unlikely given yourhistory and that they get quarterly financials just
like the rest of my investors do, and there'd be no evidence to support.
But there's none but to say thatout loud. Now my other investors,

(11:50):
you can imagine how my week,the last couple of weeks have been.
Sure, you say, a woman, a black woman, managing money
is not reconciling the check book,and we don't know where the money went.
And now I have all my otherinvestors. So now the defamation suit
is just growing because the more thatthey caused other people to be nervous about
my financial management, which has neverhappened in my entire career. Do you

(12:13):
think the professional do you think theprofessional risk to you is higher because you're
not a white dude. Yeah,I think that. I don't know for
sure if they would have even triedto pull this over on me if I
was a white dude managing a venturefunds. Wow, there's there's point zero

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three percent of private equity is managedby black women. Point zero three at
rounds is zero. So the biasthat I mean, that has been what
I've dealt with since I started thefunds. But it's just a bias that
like, white guys manage venture fundsand we don't, and we give industry
standard documents. And I don't thinkthat it ever would have got to the
point where they would say it's notbeing reconciled or I don't think it would

(12:56):
have got to the point where moneywould have just came up missing. I
think both sides would have managed theretheir language much differently. All right,
let me let me ask you aquestion that you might not like very much.
But I'm I'm troubled conceptually. Thisis nothing specifically to do with your
fund. I I get troubled conceptuallywhen governments put together big funding mechanisms that

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exclude businesses that are let's say,owned by well owned by white guys.
I happen to be a white guyand I'm an entrepreneur too, and so
this the fund that you're running,and I'm like nine News describes it as
boosting businesses that are owned by minoritiesor or women. So like, I
couldn't come to your fund because Ihave the misfortune of being a white dude.

(13:52):
Why so, I'm fine with privatemoney doing anything they want like that,
but I have some trouble with governmentmoney doing that. What do you
think about that? Yeah, Ithink that's the big I think that's the
big dialogue of the moment. Ithink it's an important dialogue. So I'm
very appreciative that you asked me rightinstead of sort of saying like, wait,
no, let me not push there, because it's a really important dialogue

(14:16):
of the moment. You actually couldcome to my fund. We have a
preference for women and folks of color, Like, we want to make sure
everyone knows that we are open tothat. We've cut a couple of why
dude on founding teams, so Imade sure to cover off on that.
So I want that to be onething. But the other thing is I
believe that our systems are so redlinesto the opposite, and we can prove

(14:41):
that with the same data that wecould prove on a fund like mine,
with every ounce of government money,that we have to do something to fix
it. So I think I'm acapitalist to my core. I think we
should really actually be operating a freemarket, which we have not gotten it
right. There's no way if youcan't have seventy percent of your population not
participating in the market, not gohumh, something's wrong. So for me,

(15:07):
the macroeconomic condition of the inequity thatexists, it can't be a capitalist
society if we continue to let thatcondition grow, and so we have to
come up with solutions. It hasto be solutions, both governmental and other
wives because it was governmental and otherwisethat got us into this position. And
I think the dialogue is really reallyimportant. And let's look at some of

(15:31):
the data on the other side,with some of the systems and some of
the policies and some of the laws, and what outcomes did they create that
are solely based on race except fornobody said it out loud. That's very
very interesting. I'd like to havemore of this conversation over over time.
You're just such an excellent, excellentspeaker. And you know I'm an investment

(15:52):
guy. I'm My background is Iwas a trader on the options exchange in
Chicago, and then I've done lotsand lots of small, very small scale
then sure investing. I love thisconversation. Let me ask you one more.
And for those just joining, we'retalking with Danielle Shoots. She's the
managing director and co founder of theDemi Fund, which is suing the City
and County of Denver for non performanceof a contract where the city promised fifteen

(16:15):
million dollars and stopped the funding afterseven million dollars and is not explaining why.
Danielle, just pick just this isn'tgoing to be fair to all of
your investment companies, But just pickone company that your fund has invested in
that you think is super interesting andjust give us one minute on it.

(16:36):
Sure we invest in companies that weknow are going to address a volume of
issues that are happening in the UnitedStates. The rate volume game is the
game I'm always playing. And youknow I a help which is run by
Joe Thurman, which recently just mergedwith another company we were invested in called
Gritty they acquired gritly. They're inthe work the workforce tech space like they're

(16:59):
Upstate and keeping people working. Wehave a real employment crisis when it comes
to healthcare education, so these jobs, the gaps are huge, and so
they've used technology in a combined wayto get folks upscaled in sort of the
early childhood education space very quickly,getting them certified so the two teachers can

(17:22):
be certified, and then working withhealthcare companies all across the country to say,
how do we get you your employeesup upscaled ready to go, and
how do we keep them there usingtechnology and data. That's one of many
of my babies I call them becauseI love our portfolio companies, but that
are solving real world, real realworld crisis issues for our economy right now.

(17:45):
Okay, and just for those listenerswho might not understand some of the
VC speak when you talk about thegap and the upscaling, just give me
a very quick answer on this.What you mean is that there are a
lot of people who would like towork but don't currently have the skills that
match with what the employers are lookingfor. So your company is giving them
the training to acquire the skills thatlet them become were the employees for those

(18:07):
companies. Yeah, the employer themselveswill pay to get folks up skills,
to get them certified, for instance, to be early childhood education, which
is a huge crisis gap. Loveit. Then those folks get upscaled,
But they also have the data forthat employee to say, here's the best
way to retain them over time.Danielle Shoots, managing director and founder of

(18:30):
Demi Fund, Let's keep in touch. I want to I want to find
out how this lawsuit, of theselawsuits, perhaps plural progress over time.
Thanks for being here, Thanks forhaving me