Set up a portal online for the payment of government-related bills, charge a fee and smile all the way to the bank.

Leveraged buyout guru and venture investor Henry Kravis and others certainly were interested. His firm, Kohlberg Kravis Roberts & Company, and Silicon Valley venture firm Mayfield Partners invested some $40 million into govWorks, allowing the government services firm to raise $60 million since its formation in 1998.

So when the company filed for Chapter 11 protection from creditors this week with debts in the vicinity of $39 million and no takers for its assets, many were left wondering what went wrong.

Some answers might be contained in the govWorks' bankruptcy petition, documents which detail the beginnings of a bright idea that became a dot-com in distress.

Two years ago, with the dot-com mania in bloom, company founder Kaleil Tuzman and four of his buddies invested $200,000 to set up Govworks.com. The idea was to build out technology that would enable routine payments to local governments via the Internet and save the headaches of dealing with a bureaucracy. GovWorks would pull in revenues from bill payment fees, charging government agencies for job postings and from the commission for auctioned items from its flagship Web site.

Convinced that the market for this was worth $450 billion, govWorks began to hire aggressively in July 1999, growing to 50 by October -- mostly techies building the software application. Investors began to show interest. Tuzman landed $19 million in a Series B round led by Kohlberg Kravis Roberts and the Mayfield Fund.

Soon after, with new offices in the Alley, the company teamed up with Cotesa Holding, Ltd. to develop a joint venture to tap into the burgeoning Latin American market. govWorks continued to expand at an amazing pace, gobbling up Jobs-in-Government, an auction site and two other companies.

By late Spring, govWorks had 250 employees on payroll. "Like many Internet companies, govWorks fell prey to the growth-at-all-cost craze," according to court documents.

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Despite excitement in the market about the possibilities, the company said actual deals to roll out e-payment services with government agencies were "much slower" than it anticipated.

With no deals coming in, and money quickly going out the door, govWorks switched gears. It began tinkering with the business model to become more of an Application Services Provider (ASP), where it would land contracts with local governments to provide the payment and transaction services. "(It was smarter) to cooperate with their online strategies and complement rather than compete with government Internet efforts," the company said.

But the tide had already turned in the markets and the company had to cut back more. Layoffs ensued with more than 60 employees receiving pink-slips at the end of April, 2000.

Then it all fell apart.

The mushrooming of competitors, fueled by a "crowded venture-capital marketplace" created similar bill-payment services, some for free. govWorks was forced to offer deep discounts on products and services.

"Implementation and operation costs far exceeded initial revenues, and as pressure mounted to shift from acquiring every client to acquiring only profitable or strategic clients, govWorks adjusted its price structure and client approach," the company explained.

By the summer of 2000, its pricing model involved charging governments for implementation and monthly maintenance fees and encouraging governments to absorb the transaction fees instead of passing them on to the consumer. In August, the company went live with the NYC Parking Ticket Internet payment processing application and branched out to other markets including New Orleans, Boston and Rhode Island.

By this time, investors were getting cold feet. The company's burn rate was north of $1 million per month and, with no significant revenues, finding additional funding became a bear. More workers were let go in the fall of 2000 and belt-tightening measures ensued.

During the summer of 2000, govWorks initiated another round of financing, expecting to raise between $20 million and $25 million, vital financing to carry the company through mid-2002, and "breakeven" point of its financial projections.

"However, with market conditions deteriorating rapidly and the technology company IPO marketplace nearly moribund, in early November 2000, the lead investor, J&W Seligman, withdrew its term sheet, and the additional investors would not close without this lead investor."

Strapped for cash, the board of directors told govWorks management to look for an additional source of funds or seek to be acquired.

More firings brought the workforce to under 60 by mid-November of 2000 and expenses were "drastically cut back" to keep the $1 million-per-month burn rate in check.

It was the beginning of the end.

The company's government auctions program was shut down and all marketing activities were halted.

American Management Systems (AMS), a publicly-traded software firm which specializes in payment technology, began buyout talks. (AMS is owed almost $7 million as a secured creditor in the bankruptcy proceedings).

Buried in debt, govWorks eventually filed for federal court protection from creditors on January 9, listing total book assets of $8 million against $39 million in liabilities.

The company said it intends to successfully emerge from a Chapter 11 restructuring to become a "successful long term business" but it did not provide specifics of those plans.

The latest: AMS has teamed up with California-based eONE Global purchase govPay, the transaction processing business of govWorks. Terms of the deal were not released but court records indicate that EOneGlobal/AMS has agreed to fork over a $600,000 loan under a Debtor-in-Possession (DIP) financing agreement.

AMS spokesman Jeff Trexel told atNewYork today the planned acquisition of the govPay software made sense because it was a "natural extension" of the company's e-government payment service. He would not comment on the bankruptcy proceedings.

Others in the e-government bill payment space remain undeterred by the demise of govWorks.

EzGov, an Atlanta-based start-up that has former New York governor Mario Cuomo on its board of directors, believes govWorks was a few years ahead of its time.

The company's CEO, Ed Trimble, said the challenge is to convince government agencies to buy into the concept before the service is offered directly to consumers. "We've always believed that the real value to be created here is to provide solutions to government agencies to serve their constituencies," he told atNewYork.com.

"There is definitely a place for a B2C player but it has to be done in conjunction with the government agencies. It is a challenge to go out and do this online without partnerships with the government agencies," Trimble said. EzGov has contracts with 65 agencies across 19 states.

"We (were) often compared to govWorks but they weren't a competitor of ours. Honestly, we have not run across them that much in selling our services. We had different strategies," Trimble added.

"They (govWorks) was more focused on providing a portal for people to interact with government. Our clients are the government agencies while they had a consumer approach. I think that, as more of those agencies come online, there will definitely be a place for a portal targeting the public," the EzGov CEO argued.

"Right now, the software has to be integrated with the government systems first or it won't draw the consumer traffic to be profitable. (This space) is still in its infancy so I won't bet against it."

Ryan Naraine is a senior editor with AtNewYork.