(FORTUNE Small Business) – Even in the hyperfrothy world of the Internet, Kaleil Isaza Tuzman seemed to stand out. The 28-year-old Colombian immigrant had a can't-miss idea. His company, govWorks, aimed to revolutionize the way people interact with government--with an online shop where citizens could pay taxes and renew licenses. He also had an all-star board, among them buyout king Henry Kravis. Investors poured $60 million into govWorks. And just weeks after launching his site, Isaza Tuzman was invited to the White House for a summit meeting with the nation's most powerful lawmakers and tech executives to discuss the future of government in the Internet Age.

But as with many dot-com startups these days, govWorks' fairy tale doesn't have a happy ending--at least for now. The company, and its principals, aren't at all unusual in that regard. What makes govWorks' story so different is that it seemed to be doing everything right. Who could argue with a business that provided folks such a useful service? Who could argue with putting the likes of Henry Kravis on your board?

Instead, govWorks, the brilliant idea, has been bungled badly in execution. Arrogant and overly aggressive, company officials have alienated key government partners and vendors. They have burned through millions in false starts and other fumbles, and it has lost time and ground to competitors. One of the co-founders has been forced out by the board and other senior executives. Now directors are looking for a more seasoned manager to help Isaza Tuzman run the company. Harvard Business School case study department, here they come.

Perhaps a year ago, Isaza Tuzman and his colleagues could have hung on with a board that was a bit more passive. But this is the new Internet era. Venture capitalists have increased startup funding tenfold in the past year, but the days of caviar and champagne are coming to a close. Internet startups are getting a painful dose of reality: Business basics still apply. Solid management, teamwork, and experience are crucial to the success of a good idea.

Isaza Tuzman has no management experience, to be sure, but he does have a colorful resume. And that was just the ticket, as it turned out. Born in Colombia in 1971, the son of a politician, Isaza Tuzman spent his boyhood in a series of elite boarding schools in Massachusetts. Just before his freshman classes were to start at Brown University, Isaza Tuzman bolted to join an ashram in India. He spent a year there before coming back to the U.S. to go to college, eventually graduating magna cum laude from Harvard.

Isaza Tuzman was working on his doctorate in Latin American studies when another intriguing side road beckoned: investment banking. He spent a few years at Goldman Sachs in the mid- to late 1990s, all the while envying the fast fortunes being made on the Internet. With a friend from high school, Tom Herman, he began toying with ideas. A wedding Website? Too much competition. A virtual cemetery? Too ghoulish. Then they hit upon govWorks.

The company was born in a fit of pique over a parking ticket. Isaza Tuzman had forgotten to pay it, and the fine had ballooned from $80 to $540. At first, Isaza Tuzman and Herman thought of setting up a site that would focus exclusively on paying parking tickets for delinquent drivers too busy to do it themselves. Revenues would come from a small convenience fee that the site would charge its customers. Soon after, the partners were joined by a Harvard buddy of Isaza Tuzman's who was bound for Stanford Business School. George Clayton Fatheree III arrived during the planning stages in the winter of 1999. He got so engrossed in the business he never made it to B-school.

The trio's ambitions soared. Why limit themselves to parking tickets? GovWorks could conceivably handle all citizen transactions with governments: fishing licenses, building permits, auto registrations, property taxes, deed research. The list--and the possibilities--seemed endless. Isaza Tuzman started talking about a "revolution." And it was. At least, on paper.

That's all investors needed to hear in 1999. Having an incendiary combination of charm, ambition, and hubris, Isaza Tuzman is the consummate money-harvesting machine. He sprinkles his conversation with quotes from Aristotle, de Tocqueville, Patton, and Whitman (Meg of eBay, not Walt of Brooklyn). Investors were bowled over by his pitch. Among them was Henry Kravis, who along with others at Kohlberg Kravis Roberts & Co. invested millions and joined the board. Isaza Tuzman also recruited other heavy hitters: former Atlanta Mayor Maynard Jackson, Chase Manhattan CFO Dina Dublon, and Hyatt Legal Services founder Joel Hyatt.

Mike Levinthal, a venture capitalist with Silicon Valley's Mayfield Fund, was so impressed after a single telephone conversation with the young entrepreneur that he had him fly out the next day to his firm's office. Later, the fund invested millions. Says Levinthal of govWorks' trio: "They have the potential to build something quite substantial."

The e-government market did and does look promising and challenging. By the estimate of consultants Dataquest/Gartner Group, the U.S. government will spend $1.4 billion in 2000 on Internet solutions, making it the second-largest vertical market in total spending on the Net, after financial institutions.

And by 2002, the number of U.S. citizens using the Internet to access state government-agency services will more than double, to 111.3 million, according to Deloitte Research, an arm of Deloitte & Touche and Deloitte Consulting. Scores of companies are popping up to target this fast-growing market--among the strongest, ezgov.com in Atlanta and the National Information Consortium in Overland Park, Kan.

GovWorks was one of the first but has teetered on the edge of chaos since inception. Isaza Tuzman recalls how board member Joel Hyatt asked him whether his company would grow slowly and maintain control or grow quickly and lose control. He chose the latter with the board's approval. In 14 months, the company exploded to 250 employees in seven cities. But the inexperienced founders made blunder after blunder. (Isaza Tuzman brushes aside concerns about the company's apparent disorder by quoting Patton: "A good plan violently executed now is better than a perfect plan next week.")

Those blunders? GovWorks created a demo site for citizens of Alameda County, Calif., and misspelled Alameda. Two cities, Stamford, Conn., and Springfield, Mass., backed out of agreements to test municipal sites developed for them by govWorks. City officials were offended that the company put out a press release bragging about the deals before they had officially been signed.

Another misstep was a multimillion-dollar ad campaign that jeered government. The campaign was so extravagantly arrogant it raised eyebrows even on seen-it-all Madison Avenue. Featured in magazines including The Industry Standard, the ad pictured a graph denoting high and low points in U.S. history. (Low points: Bob Dole utters the words "erectile dysfunction"; Secretary Hay offers Lincoln two balcony tickets to the theater.) The pinnacle, according to the ad, was the launch of govWorks. The first ad angered government officials so much that it was pulled in some publications, and the campaign was ditched.

GovWorks' attitude proved to be a costly strategic error. Early on, Isaza Tuzman thought such a stance would win his company fans among the public, who, after all, were the ones who would be paying the fees to use the site's services. But govWorks was learning quickly that elected officials and government workers were in fact critically important to the company's success. "Companies cannot dis-intermediate government," says Rishi Sood, an analyst at Dataquest/Gartner. "In order for e-government projects to be financially successful, they need the backing of political leaders."

If govWorks' ad deeply angered some government officials, its sales pitch put them over the edge. Consider govWorks' experience in San Francisco. The city was seeking a private-sector partner. City officials intended to offer citizens several transaction-related services online. GovWorks approached a number of city officials looking for a deal but was rebuffed. GovWorks' pitch: Work with us or not, we don't care. We're coming to your city anyway. Rod Loucks, the chief technology officer for the city and county of San Francisco, called the company's approach "irritating." Bottom line: San Francisco cut a deal that could be worth millions with competitor National Information Consortium.

Such incidents caused severe damage to govWorks' efforts all over the country. Bureaucrats are a tightly knit group, easily offended, and sometimes resentful of private enterprise. GovWorks' mistakes won't be forgotten soon. "I don't want to partner with an organization that's looking to disparage what we are doing," says Thomas Hamilton, director of administration for the city of Stamford.

GovWorks mangled more than just government relations. The company proved so difficult a client that its advertising agency resigned. Fallon New York completed a TV spot but walked away from a $40 million account. (Fallon creative director Jamie Barrett denies that the parting is acrimonious.) Another Fallon employee said Isaza Tuzman booked a meeting with an account executive in his limo on the way to the airport; it apparently was the only slot open in his schedule.

GovWorks also had problems with its Web developer, Sapient of Cambridge, Mass. Herman says he was too frazzled to effectively manage the 60 Web engineers working on his site. "I didn't have all the details I needed or the time or the knowledge," Herman concedes. Sapient and govWorks completed their contract but are no longer working together. (Sapient co-founder J. Stuart Moore still sits on the govWorks board.)

By way of apology, Isaza Tuzman and Herman blame their youth and business inexperience. "Things are so crazy in this market," Isaza Tuzman says. "Things get so complicated." Says Herman: "We're young kids." No one other than the founders and their investors can say for sure what kind of financial impact the snafus had on govWorks, a private company. But certainly their missteps gave competitors extra ammunition as they made their sales pitches. Directors are concerned but not alarmed. Board member Levinthal says these aren't big mistakes. "It's easy to cancel ads, to redo a site," he says. Board member Kravis adds: "GovWorks is not hard to turn around. It's not hard to correct because of the size and scope of a startup."

Over the past few months, govWorks has been working hard to make amends. It has hired a number of former government officials to help it communicate with city, state, and federal workers. Among them: Sal Salamone, former chief information officer of New York City, and Michael Hernon, former chief information officer of the cities of Boston and Washington, D.C.

GovWorks has taken other steps too. Most employees are required to take an internal training course called Gov 101. In it, they learn tips for dealing with government employees. Example: GovWorks now leaves it up to its city partners to announce when they're working together.

GovWorks has also been sponsoring roundtable breakfasts to foster better relationships with government officials and is earning kudos for courage. Liza Lowery, information chief for the city and county of San Francisco, says she attended one such meeting in Northern California and actually felt sorry for the company reps. "They were pretty brave to sit there and listen to the feedback," she says. She also appreciates that co-founder Fatheree visited her office to discuss how govWorks could make amends. Still, "for many chief information officers, there's a bad taste when the name comes up," Lowery says.

To help please Lowery and others, govWorks recently took on two new partners that will aid its comeback by raising its credibility and opening new doors in government circles. One is American Management Systems, a large and respected government consulting firm based in Fairfax, Va. AMS has more than 300 government clients, including the cities of Chicago, Los Angeles, and New York City. The partnerships will allow govWorks to offer its software technology and online services to citizens of those places. GovWorks' other new partner is Arthur Andersen, the accounting firm, with whom the startup will work to develop technology for government agencies and businesses to interact. On its own, govWorks has signed cities that include Augusta, Georgia; East Hartford, Conn.; and Pasadena. It also signed its first national government portal, Colombia.

Now comes the real hard part for the founders. Apparently weary of the inexperience in the executive suite, govWorks' board is taking a firmer hand with the business. Isaza Tuzman says he has been told by the board that it is seeking a more seasoned executive to help him run the company. "This is the game we agreed to play: to increase shareholder value," he says. "Part of doing my job well is bringing in the right senior people, but as this comes closer the emotional sting becomes more real."

In April, under pressure from the board and other senior managers, Isaza Tuzman fired co-founder Herman. The two had struggled with leadership issues for months. The board and upper management felt Herman didn't have the skills necessary to help the company grow. "It was the toughest thing I've ever gone through," says Isaza Tuzman. Herman is embittered. He's leaving his company with two years' salary (he won't say how much), but he loses a substantial stake in the company. "I spent 14 months building a Ferrari," he says. "Now I'm told I can't drive it."

For Isaza Tuzman, govWorks is a bittersweet achievement. "The adrenaline rushes don't come as often," he says. Not that the boyish chief exec seems to mind. He says he's committed to govWorks for the long haul but looks forward to sharing responsibility so he doesn't carry all the weight.

On a balmy Friday night in April, Isaza Tuzman and Herman meet for the last time on company business in the conference room. Both men are clearly exhausted, and the mood is somber. Isaza Tuzman questions whether the experience of building the company was worth the price he paid. "This is supposed to be the prime period of our lives," he says. "I've destroyed my health. Family and friends are worried. I'm wasted."

Isaza Tuzman sacrificed not only his health and his youth. A decade-long friendship was bruised when he had to fire Herman. Will they ever work together again? Maybe, they say. They do agree on one thing: It won't be in such a competitive marketplace. "Something mom-and-pop," says Herman. "A radio station," says Isaza Tuzman. Who knows what the future will bring for the two? After all, Michael Milken is selling vegetarian cookbooks. And as Isaza Tuzman says, "Life is long."