After all, the messy demise of Govworks.com, an online government services provider, was chronicled in the 2001 documentary "Startup.com." The film showed a company enriched by $60 million in venture backing, growing too fast and losing focus. A low point came when Isaza Tuzman fired Herman, his childhood friend and Govworks co-founder.
But both men now say they've learned their lessons, and they're using them in their latest venture. Isaza Tuzman, 30, now heads Recognition Group, a New York firm that invests in and advises distressed companies.
Herman, 31, is an affiliate partner with the firm, although he recently took a leave of absence to assist his father's business in New Hampshire. The friends have reconciled since their falling out over Govworks.
Since late 2000, Recognition Group has advised about 25 companies and purchased controlling stakes in three firms. It has sold two of these companies for solid returns, Isaza Tuzman said.
Fame from the Startup.com movie has been a mixed blessing.
When Isaza Tuzman meets with prospective clients or investment targets, they often recognize him from the film.
He first tells them what he calls the bad news: "I've lost some very powerful people a lot of money. I thought I was smarter than I was, and I made some stupid decisions. My reputation is colored as a result, and you should know that if you're going to do business with me."
Then the good news: "I'm trying to internalize the lessons I've learned and avoid similar mistakes in the future. I'm as hungry as anyone out there because I'm trying to restore my reputation."
One of the biggest lessons he's learned is that the various parties involved in a startup must communicate with each other.
"Say it truthfully, say it completely and say it first," Isaza Tuzman said. Investors should be willing to tell entrepreneurs when they intend to take "critical and brutal action" with a troubled startup, for example.
Entrepreneurs must be willing to hear dissenting voices, whether it's from a venture backer or from elsewhere in the company, he said. Founders must also be willing to step aside to let more experienced managers run the company.
Another lesson is to address problems before it's too late. A common mistake for entrepreneurs is to deny when their companies are in trouble, Tuzman said.
Herman adds other mistakes: trying to grow too fast and not being focused enough.
Founded in 1999, Govworks grew to more than 200 employees within a year. But the Internet bubble popped, drying up funding. Govworks wasn't generating enough cash to keep going. It filed for bankruptcy in late 2000 and First Data Corp. and American Management Systems Inc purchased its assets.
One ironic lesson is that private equity investors aren't such bad guys after all.
In Startup.com, Herman expresses disdain for Highland Capital Partners, a Lexington, Mass., firm that considered investing in Govworks. Herman believed the firm was trying to take advantage of Govworks by seeking too much control. The two sides ultimately failed to agree on terms.
But now, as an investor in distressed companies, Herman is more sympathetic.
"I have a totally different perspective on that today," Herman said. "If we had had Highland ... we probably would have been much more successful. They had more of an interest in building a great company. They had more knowledge to contribute."
Isaza Tuzman and Herman are trying put behind them any pain caused by Startup.com. But, when possible, they've also used it to their advantage. Isaza Tuzman, who worked in investment banking at Goldman Sachs Group Inc. before Govworks, has written a book on entrepreneurship that will be published by Harvard Business School Publishing in January 2003. The film has helped get free media publicity for Recognition Group.
One of Recognition Group's investments was KPE, a media services provider. The firm's investment arm acquired KPE in late 2001 and sold it to Mobilocity Inc., a New York provider of mobile computing services, in February. Recognition Group also purchased PureCarbon, a Sunnyvale, Calif., application service provider, earlier this year, then sold it to Workstream Inc., an Ottawa professional services firm, in June.
The blended returns from those two deals was about eight times the initial investment, Tuzman said. He declined to provide further details, or to identify the third investment.
Recognition Group seeks controlling stakes in distressed companies with less than $150 million in annual revenue. The firm works on behalf of other private equity firms and workout groups within banks.
Copyright 2002. Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
