PAIN IS THE GREATEST TEACHER PAIN IS THE GREATEST teacher, says Kaleil Isaza Tuzman. He has learned a lot in the past few months. In early November, Mr. Isaza Tuzman, founder and then-CEO of govWorks Inc., was in his lawyers' office, about to sign papers closing a $25 million round of financing that would keep his company running until mid-2002, past the break-even point in its projections. Then, over his cell phone came the voice of the principal partner in the lead investment firm, J&W Seligman: "We need to reassess." Citing turbulent market conditions, Seligman had decided to hold off. Without the lead investor, other investors wouldn't close. Mr. Isaza Tuzman felt numb. GovWorks was down to about $2 million in cash, enough to keep the company running for two months. With a board of directors meeting a week away, Mr. Isaza Tuzman spent the next several days urgently pitching other potential investors--to no avail. Today, he describes his move as "a reflexive reaction of caring and shock and trying to put the pieces back together. But that was clearly a futile exercise, trying to put a deal together in seven or eight days." GOVWORK'S PREDICAMENT is emblematic of the situation scads of tech and Internet companies now face. Most do what Mr. Isaza Tuzman did -- shift into manic survival mode. Often what they should be doing is managing an exit: either shutting the doors or selling whatever possible. "You'd rather have an organized, well-thought-out, managed wind-down than what's happening to most companies: You go till you have $5,000 in the bank, then shut the doors," Mr. Isaza Tuzman says. In that situation, the companies are left with no money or strategy to handle creditors, legal issues and a host of other matters. Mr. Isaza Tuzman, 29, had a bright idea a couple years ago. While moving apartments in New York City in 1998, he found an old, unpaid parking ticket. Wouldn't it be great if people could pay parking tickets and take care of other municipal business online, he thought. With a friend, he started govWorks, a pioneer in e-government. He raised $60 million from such firms as the Mayfield Fund and Kohlberg Kravis Roberts. He hired 233 people. He brought in big city and state clients and started international operations. But revenues didn't follow, not even after he changed his business model from a consumer-oriented provider of government services online to an application service provider model, contracting with local governments to provide technology for their online efforts. He started cutting costs and laying off staff, taking the excruciating step of dismissing his own father, who worked for the company abroad. By fall, the staff was down to 115 and the $25 million financing was near completion. "I felt like we'd done it, turned the corner," he says. Then the deal collapsed, and everything deteriorated fast. No investor wanted to touch govWorks. At the board meeting, Mr. Isaza Tuzman argued for continuing to go on the road and put together financing. But the board felt the more responsible course was to look for a buyer. Mr. Isaza Tuzman stepped aside as CEO, following an earlier agreement, but stayed on as chairman. The company sought Chapter 11 bankruptcy protection in January. Assets: $8 million. Liabilities: $40 million. Last week, the firm completed a sale of its core transaction-processing business to eOne Global LP, an electronic-payments firm in Napa, Calif., and American Management Systems Inc., a technology consulting firm in Fairfax, Va. MR. ISAZA TUZMAN is frank about mistakes he, the board and investors at govWorks made. "I decided I wanted to embrace the experience as a whole -- that means delving into the lessons and trying to apply them in a positive way." Toward that end, he is working with three partners to counsel distressed technology companies on a course of action: attempt a turnaround, sell, or shut down. The bigger part of the new business, Recognition Group, is taking an equity stake in those with turnaround potential. He tries to bring the entrepreneur along emotionally as well as intellectually. Dismantling a company, he says, can feel "like cutting the limbs off your own child." He is writing a book about the "sins of early entrepreneurship" to help others avoid pitfalls. He believes his mistakes included: 1. He should have stepped aside earlier as CEO. 2. He should have delegated more effectively. 3. He worried too much about what people thought of him, which led to poor business decisions. 4. He believed the hype about the Internet and mantras like "go big or go home." 5. He hired people too much like himself. 6. He trusted people too much -- the venture capitalists, clients, employees and the media -- instead of understanding the motivation of each party. 7. He didn't spend time as wisely as he could have, focusing on speeches and "press opportunities" instead of "value creation." Though he is open about his missteps, Mr. Isaza Tuzman notes that everyone, from boards to investors, is facing the same predicament. "The venture-capital industry as a whole was very much on the same gravy train as the entrepreneurs, and it was a shared vision, just as today it is shared apoplexy." Derby Management 399 Boylston Street, Boston, MA 02116 Tel: 617-292-7420