Why have these ads made such an impression on me? Because I’ve spent a week sitting in stopped Bangalore traffic looking at them. Ironically one keeps boasting: CONGESTION-FREE MOBILE NETWORK. Sitting still and listening to the honking of cars, mopeds, bikes and rickshaws all around me, it’s an easy guess that, if true, MTS could be the only thing congestion-free in India.

I used to think I knew bad traffic. After all, I moved to Silicon Valley during the famed Internet bubble when Highway 101 slowed to a crawl during peak commute hours. And I’ve spent time in legendarily congested US cities like Los Angeles and New York.

Now that India has one of the world’s best mobile infrastructures, it needs a decent road infrastructure. And a smart entrepreneur needs to come up with a modern fix. But before we talk solutions, let’s dwell more on the problem.

Simply put: All of you Americans—or Londoners for that matter—who Tweet about sitting in traffic have nothing to complain about compared to the emerging world. And in my experience, so far, India’s traffic is the absolute worst. A drive between cities that should take an hour takes four. A commute across a city can routinely take two hours-plus. We’re not talking about rush hour. I’ve quickly learned to allot at least three hours for each meeting—one hour for the meeting and one each for getting there and back.

Even so, despite my best efforts, I’ve been late for nearly every meeting. In Mumbai one meeting scheduled for late morning took six hours out of my day. (Fortunately, the meeting was well worth it.) And in Bangalore my cab driver tried to take a back-alley short cut, when suddenly, our path was blocked by a cow just munching on some roadside grass. He honked and honked and she just looked up and batted her pretty brown eyes at me as if to say, “Oh, you’re not making that meeting on time, hon.”

Indians complain about the poor foresight and urban planning of their government, but it’s not all the government’s fault. The Chinese government is the master of over-building capacity to anticipate growth, and city traffic in China is becoming unbearable as well. It’ll only get worse as an anticipated 30% more cars per year come on the road.

The problem is the hyper-charged urbanization these countries have experienced. In the West cities grew over centuries allowing city planners to adjust and modernize as industrialization drove higher occupancy. And in the past few decades there’s been a flight out of downtowns to suburbs. Of course that presents its own growing pains—especially in US cities that have experienced massive suburban sprawl like Phoenix and Atlanta. But in the grand scheme of things, the moves have been predictable and manageable, whether individual cities have handled it well or not.

Not so with the rapid urbanization of cities like Beijing, Shanghai, Shenzhen, Delhi, Bangalore and Mumbai. The step up in pay from hundreds to thousands of US dollars a year has been swift and far reaching. In China, agricultural classes have moved en masse to staff huge several-thousand-person factories, and for the Olympics, they moved en masse into hospitality jobs in Beijing’s raft of new hotels, malls and restaurants. This is to say nothing of the increase in government jobs and startups. There is simply no way to make remotely the same wage or have the same access to infrastructure and services outside a city. In some parts of India it’s been more pronounced as hundreds of thousands of sophisticated R&D jobs typically pay more than China’s factory jobs.

Here’s my point: All the existing Western solutions, endless government funds, underground subways and top urban planners will not solve this problem. Because simply put: The world has never seen urbanization so extreme by millions—maybe even billions— of people seeking a better life. We need some innovation here. And I know at least one guy who is thinking about it.

At a conference earlier this year, Elon Musk – the guy who co-founded PayPal, Tesla, SpaceX and laughs like a James Bond villain — talked about two new businesses he was mulling.  One was electric, supersonic planes, which I’ve salivated  over since. The other was pre-fabricated freeway overpasses to alleviate traffic by making it go vertical without the costly billion-dollar customized expansion fees.

I have to admit, at the time, I was more excited about the planes. But his freeway idea may be a better business. It would dramatically affect the lives of billions (literally) and create at least millions of revenues in the developing world where quick, cheap options are needed and there is hot-and-heavy government money to pay for it.

Now, clearly Mr. Musk is busy with existing ventures Tesla and SpaceX. So now’s your chance to steal the market out from under him! India and China are waiting.

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These weren’t middle class kids on the well-trod, parent-driven Indian path to seats at IIT. These were Delhi slum kids, whose families likely live on less than $2 a day. And yet, for the last five years, they’ve spent several hours of their free time every day playing games and learning English, Math and Science on computers.

So how have they bridged the much-agonized-about digital divide without a hand out from a chip company, computer company or wealthy philanthropist? A for-profit Indian company called NIIT.

It started back in 1999 when Sugata Mitra, NIIT’s chief scientist, noticed his kid could learn how to use gadgets like a mobile phone far faster than tech-savvy adults could. At this time, most computer “labs” in Indian schools were one or two computers that were only to be used under the strict supervision of a teacher. The reasoning was computers were expensive and required training and supervision. As a result many kids only got to look at them from afar in the classroom.

Instead Mitra wondered what would happen if he left a computer out in the open for a group of children to discover. So he literally knocked a hole in the office wall to the slum on the other side.  He shoved a computer in the hole and set up a camera on a tree limb to record what happened. A 13-year-old, illiterate kid who’d never seen a computer wandered over tentatively, and soon realized he could move the cursor by moving a finger across the touch pad. Within four hours, a small group of kids had gathered. They had figured out how to open Internet Explorer and were playing a game on Disney’s Web site. “All of us were absolutely shocked watching that,” says Abhishek Gupta who heads the program now. Some expected the kids to break or even try to steal the computer.

A pilot project with the World Bank followed, and 22 of these “Hole in the Wall” kiosks were set up around the country from 2001 to 2005. The organization studied the results closely. The most obvious take-away was that kids left on their own will learn computers. The project also helped develop team-building and social skills—with 200 kids sometimes huddled around one screen. Whether the computers lead to more general academic improvement was less clear, but in many cases it was up measurably, Gupta says.

But interestingly when that partnership was over, NIIT didn’t take the project down the non-profit route. It’s not because the company is adverse to such things—it’s also opening a new high-end university that is run as a non-profit. But there’s a unique attitude in India that believes the way to eradicate poverty is to turn India’s scrappiest, free-market entrepreneurs on the problem, not to increase handouts.

NIIT now sells the kiosks at between $6,000 and $20,000—depending on which model and how many screens—to the government, who puts them mostly in schools in India’s poorest areas. There are 500 stations in India and a handful in 10 different African countries.

Having customers means NIIT has had to compromise on the original vision. For instance, the government requires administrators to keep an eye on the systems. They’re not open when an administrator isn’t there. But running the program as a business has assured its survival and given NIIT the cash flow to pour money into content creation so it doesn’t have to rely on the country’s spotty Internet connections for kids to stay engaged. Gupta says his job isn’t necessarily to be a profit center. Success is running a break-even program that makes a social impact. But that’s still a world away from a donor-funded program.

NIIT isn’t alone. For profit companies have made microfinance loans for years in India. One of the most known is SKS Microfinance. It was run as a non-profit in the early days, but when it was time to scale, decided to turn into a Sequoia Capital-backed startup. “It’s important to realize the poor have been paying three-to-four times more to the local money lender,” says Surendra Jain, a managing director with Sequoia in Bangalore. “There’s nothing wrong with using the same tools to scale the way other companies scale. The question is: In your heart are you doing the right thing?”

Even non-profits I’ve met over the last two weeks run themselves to rely on revenues not donors. An example is LabourNet,  a company that seeks to move India’s huge informal workforce into a formal channel. The company organizes phalanxes of construction crews, drivers, cooks and retail clerks and matches them with the best employers. How does it reach them? Word of mouth and SMS. So far 7,000 workers are in the system.

It was started by Solomon JP. His umbrella non-profit organization, MAYA, has already produced one self-sustaining company that trains poor youth in making high-value furniture. With a grant from Bill and Melinda Gates Foundation, CHF International, an international NGO addressing urban poverty in India, is providing technical and financial support to help LabourNet become a self-sustaining enterprise. “Being poor isn’t about not having money, it’s a lack of capabilities,” JP says. So LabourNet doesn’t stop at getting poor people a job, it offers access to healthcare benefits, issues ID cards, and helps with bank accounts, literacy, and job training too. The worker pays a small fee, and the employer pays LabourNet a larger one in exchange for matching them up.

It’s hard work. JP has been working with the poor in Bangalore for some 15 years and says it’s like Hotel California. “I don’t recommend this path. I can never leave. I’m trapped!” he says with a weary half-smile. (I’m not sure what percentage of that is a joke.) But he believes he and others can solve the problem through self-sustaining means as long as organizations don’t sacrifice humanity in the name of efficiency.

It’s a dramatic difference from China, where most entrepreneurs are building businesses that are aimed squarely at the top of the pyramid or the burgeoning middle class. But since India is a democracy—and not an authoritarian one—it doesn’t have the same social safety net of other emerging worlds. It’s fitting that it’s trying to use a free-market economy to solve its social ills instead— something American do-gooders could probably learn from. After all, we’ve got our own digital divide.

One final note on NIIT’s Hole in the Wall program: It was allegedly the inspiration for the book “Slumdog Millionaire” which spawned the movie. “Where’s my Oscar?” is a favorite joke of Rajendra Pawar, the chairman and co-founder of NIIT. I asked a lot of people working to eradicate poverty how they felt about the movie, and most said it was neutral-to-positive for India. It doesn’t hurt to show rich Americans how one-third of India’s 1.2 billion-person population lives, even if it was sensationalized. The difference is none of them are banking on a one-time windfall as the answer.

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So after four years, he headed back into the safe world of banking. And then, in 2000, with some money saved up, he decided to leave again and do things his way. Enamored by the Internet and frustrated by how hard it was to travel in India he opened MakeMyTrip.com. The site—as you might guess from the name—was like any of the online travel brokers started during the dot com bubble, only it was in India.

Of course, that was a pretty crucial difference. That venture too was ahead of its time, but it was his and Kalra stuck it out. After the market crash and September 11, Kalra’s foreign investors reneged on $1 million in funding commitments. Then there was the triple whammy of SARS, which made everyone want to travel in Asia less. He was 31-years-old with a wife and a baby at a time when starting a dot com was insane and in a place where it was downright suicidal. Indeed, many VCs will tell you today that India—where only 50 million people are online and just two million have broadband connections— is still not ready for the consumer Web.

But Kalra and two senior managers bought back their equity in the business and agreed to go without salaries for 18 months. He called a meeting and asked the staff to take 40% paycuts. Twenty-five of them stayed and 17 balked and quit. Kalra decided to focus on selling travel to returning Indian expats rather than locals, but he kept an eye on that sleeping giant of a domestic market.

A year later, MakeMyTrip broke even, in 2003 he reluctantly decided to trust VCs again and in 2004– when Internet adoption in India had finally started to grow and much of the Indians who had the money to travel had credit cards, bank cards or access to money transfers—Kalra came back to his original vision of building the Expedia of India. “There’s a fine line between resilient and stubborn,” he says, sitting in his office in Gurgoan surrounded by globes, maps and maps with mashed-up pictures of many of those employees who stayed. “It worked out, so we can say we were resilient. But at the time I worried I was just being stubborn. But I figured you regret the things you don’t do in life, not the things you do.” When I met him the day before, Kalra easily rattled off details of a bowling supercenter that opened up down the road after his AMF days. You can tell it stings a bit, but if we were sitting here having the same conversation about an online travel company that took off after he gave up, it’d be devastating.

What Kalra didn’t know back in those dark days was that he was about to benefit from a global Internet truism: Online travel is the ecommerce gateway drug. It makes up some 70% of global ecommerce, it was one of the first categories to take off in the United States and one of the only markets big enough to sustain a host of publicly traded Internet competitors. Similarly, Ctrip was one of the first big Internet hits in China.

India—a country with few Internet homeruns—took longer. But Kalra’s company is now making $5 million in US  dollars of profit this year and doing more than $500 million in gross bookings. Revenues are up 88% during the recession and one-out-of-every-twelve domestic flights in India is booked via MakeMyTrip.com. After airline tickets, the second biggest category is railway tickets—the site sells 2,500 of them every day. Kalra is busy interviewing a lot of US-trained management types to augment the team. Don’t look now, but MakeMyTrip could be India’s next dot com IPO. (Like most well-behaved CEOs, Kalra wouldn’t comment on any immediate IPO plans.)

Why does travel take off so fast? For starters, it’s one of the only categories where you buy something that’s delivered over email. Forget costs—in emerging markets shipping to far-flung areas doesn’t always exist. Kalra says etickets may have saved the company. For most, booking online doesn’t require a huge change in the way they buy travel. In pre-Internet days in India and the US most people booked travel through a travel agent who’d pull up inventory in a computer. The Web just cut out the middleman. (And his fees.)

Travel won’t be the ecommerce exception forever. India’s rush of a middle class with disposable income is evolving fast. When Kalra was growing up no one went on Honeymoons abroad and now most of the kids in his office do. And hotels were verboten—you visited family and stayed with family. Kalra has a hunch the next local ecommerce hit could be FlipKart, an online book retailer with a whopping 5 million monthly uniques, profitability and a new round of cash from Accel in the bank.

And there’s the so-called “last mile” problem. Kalra doesn’t plan on addressing it by opening more stores. Instead, he’s playing with the idea of a business-to-business product, where existing local travel agents would use a slow-connection optimized version of MakeMyTrip to access more inventory than they can now and sell through the site’s existing back-end system. He doesn’t want to cram an efficient online option down the throat of a population that knows its local travel agent and likes to go in and chat with them, have a cup of tea and discuss cricket scores. And clearly one deal with a travel agent is a far more efficient way to reach a whole village.

Kalra is smart. He studies every competitor out there. He’s ripped ideas off lesser-known companies like FareCast.com, corrected me on the pronunciation of China’s up-and-comer Qunar.com (so much for my Mandarin lessons), and can quote Expedia’s customer conversion rates. (They’re 6%, by the way. His are 7%. It’s the most important metric he watches.)

Ahead of his time or no, Kalra is glad he took the risk when he did. He’s not sure he would today even with more money in his savings. He’s also glad he didn’t give up on India’s domestic market, “If I’d been in Silicon Valley I’m convinced we might have reached scale in half the time, but we also probably would have been obliterated by the competition.”

That’s the benefit of slowly emerging markets that’ll eventually have a big payoff—you get time to make mistakes.

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I met up with CEO Gary Wang and COO Sam Lai, who already raised some $85 million from Granite Global Ventures and General Catalyst Partners, and they swore they weren’t here trying to raise more cash. That’s a bit of a shock. Last we wrote about Tudou and its arch-competitor YouKu, they were burning through hundreds of millions between them trying to find what YouTube still hasn’t: A way for online advertising to pay for video’s outrageous broadband costs.

But more on Tudou’s financial prospects in a moment. One of the more interesting things we talked about was the company’s new push into mobile. Last week, Tudou won a deal to be the online video channel for China Mobile. Other than one-upping YouKu, who Wang says lost the deal, this doesn’t mean a huge amount yet. So far video can only run on high-end phones and much of China can’t even get 2G access, let alone 3G. And those who can have to pony up a pricey 150 RMB a year. While many game companies have reached massive new audiences via mobile, the people watching Tudou’s videos on their cell phones are likely the same affluent audience the company is already reaching.

But Tudou sees that changing in a few years for four reasons. One, China Mobile is investing some 58 billion RMB to build out 3G capacity in the country this year and will match that investment next year, hoping to catch up to other countries soon.

Two, phones are changing. Taiwan chip company MTK is developing chipsets that allow very low-end phones the ability to download and upload video. Low-cost MTK chips already supplies chips for roughly one-third of the Chinese handset market, Wang says.

Three, concurrent with the connectivity roll out and the dramatic step- up in what a crappy feature phone can do, data plans are plummeting in price. Lai says China Mobile is planning video-subscription plans that offer unlimited uploading and downloading of video for the equivalent of 75 cents a month. That’ll break user generated video in China wide open.

And lastly, in China people are replacing their handsets roughly every nine months. That means all of these changes could ripple out faster than if they required, say, a PC upgrade cycle to complete.

Forget YouTube running on an iPhone as the model—if Tudou’s plan plays out this could mean huge things for video in China, India, Africa and any other emerging market where basic mobile handset adoption and access is widespread but laptop-Internet usage lags. User generated video, gonzo journalism, and self-expression on this kind of scale will make Tweeting about the Iranian election (even if the merit of that can be debatable) look like a prehistoric version of social media-helping-social-good.

And of course, in many countries monetizing over mobile is easier than monetizing over the Web, because mobile minutes—whether pre-paid or subscription based—are essentially becoming currency for people without credit cards.

Tudou sees mobile video starting to take off in 2010, growing rapidly in 2011, and in 2012 generating enough actual revenues to equal what it makes in traditional online advertising.

So, what about those online ads? Wang had vowed when we last talked that the company would prove profitability without raising more money. There are two ways to do this: Sell more ads and clamp down on broadband. To stay alive Tudou, and some of its competitors, have had to do something most Valley companies would find unimaginable: Restrict how many people can view their site. By just making its broadband pipe bigger, Tudou, YouKu or a new competitor could double views in short order—but it’d be bled dry financially in the process. Proof? Since we last talked, Wang says he’s doubled bandwidth and was at capacity again in two weeks.

To add to the costs, Wang is running around Asia doing content deals to add professionally produced, non-pirated content to the 30 million pieces of video inventory Tudou has already. In fact, next year, he expects to spend more on content deals than on broadband. He says these deals are small compared to what gets done between the Valley and Hollywood. A hot new show (think an “Entourage” of Asia) may cost the equivalent of $200,000 US dollars for a two-year run, while a popular, but older show (think a “Friends” of Asia) would cost just $200 in US dollars for a two-year run.

Meanwhile, Tudou is producing a ton of original content including a TMZ-style entertainment news show and a “Who Wants to Be a Millionaire?” style reality show it co-produced with Nokia. Reality TV is a natural for producing lean content for a mostly TV-entertainment-starved nation. The Nokia show cost some $500,000 in US dollars to produce and thirty million uniques tuned in for the six live shows, where contestants could use friends or search engines on their Nokia N97s to help get the answers. A 20-year old girl won 1 million RMB at the end. In fact, it’s original content like that that helped Tudou win the China Mobile deal over competitors, Wang says. (No one wants to get dragged into a copyright war who doesn’t have to.)

It may seem a lot for one company to take on, but that’s the Internet business in China. Since so much of what we’d consider “old” media is developing at the same time, it’s a total land-grab free-for-all when it comes to content and information.

That’s the cost side. Wang said that revenues are increasing 40% per quarter, but admitted it was a small base. Total advertising revenues in China are small for the market: about $15 billion-$20 billion in US dollars. Half of that goes to TV, and a tiny 6% or so goes to online, Wang says. It’s at most $100 million in US dollars the country is carving up. (This could explain why sales of virtual goods are such a hot market.) He’s hoping to break even next year.

To put it mildly, between broadband costs, content deals, pioneering a new advertising segment in a young ad market, and now moving video to mobile, this is not an easy business. There’s a reason that out of thousands of YouTube copy cats, YouKu and Tudou are the only big ones that have survived, by most people’s estimations.

But unlike when I wrote my post last May, there seems enough traction that someone can survive in China’s online video business—whether it’s Tudou, YouKu, or a competing site launched by an existing Chinese Internet giant like Tencent or Sina. And that’s good news for the country’s 200 million Internet users.

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For Chicago-native Brian Sloan, it was about the time he was being questioned by police for trafficking and dismembering human skulls.

Sloan seems normal. Even boring. I met him with some other Beijing entrepreneurs last week over hot pot and he refused to eat anything out of the spicy side of the pot. He has a slight build, non-descript features, and mousey brown hair. He even has a law degree from Penn State. But his life took a more interesting turn in 2004 or so when he started to scour antique shows and auctions for things he could sell for more money on eBay. What motivated him? “Making money,” he says. Not so much for the cash itself, but the chase, the deal and the challenge. Buying something undervalued—even weird— and figuring out who would highly value it.

Long story short: He starting to realize China was a treasure trove of things to buy low and sell high—among them, human skulls that he imported in a box marked “TOYS” and then boiled, cleaned, broken apart and screwed back together and detailed for medical students. A good skull would cost about $100 each and he could sell it for as high as $800. (What makes “a good skull”? Turns out it’s the number of teeth.)

It all went well until the day an eccentric Chicago puppeteer named JoJo Baby came by the house to buy some mannequins and saw some skulls boiling on the stove. He naturally assumed Sloan was a serial killer and called the cops. This YouTube video (also embedded below) pretty much says the rest. It bears noting, Sloan was never actually arrested or charged, although he still complains that he never got his “inventory” back from the mustachioed, gum-smacking Chicago brass who spent days trying to work him over Law-and-Order-style while TV satellite trucks camped out in front of his apartment.

Sloan moved to China soon after. It was considerably closer access to the things he was selling and, let’s just say after the skull incident, filled with more open-minded people. “In China, people respect what I do as a business,” he says. Which would be a boon in his next career move… making latex fetish-wear. (Link very NSFW.) And that’s where the Chinese supply chain magic came in. He was able to tailor nearly any outfit in any size and ship it at a healthy mark-up. Some outfits go as high as $800.

But even that pales next to his new business. How should I put this and still be a lady? The product is called “AutoBlow” and it has nothing to do with cars. Here’s the site. Warning: It’s very, very Not Safe For Work. (Yes, I’m spelling the letters out this time, just in case.)

Like a lot of entrepreneurs in China, Sloan is cagey about what I can and can’t say about how the operation works. That’s not because it’s illicit—it’s because it’s so incredibly lean, flexible and outsourced that he doesn’t benefit if competitors realize exactly what he’s pulled off business-wise. But suffice to say with a small army of employees peppered around the globe, Sloan—aka the “Kinky King of Beijing”—is looking at an incredibly profitable business that’s already generating more than $1 million in revenue and growing quickly. He’s exploited what each region does best: Romanians are his programmers and SEO, Indians and Brazilians do his Web design, and China does the manufacturing and fulfillment. He hired his whole staff without leaving his living room. His next act? Finding new products and following the same playbook.

My point here isn’t to write a salacious post about skulls and sex toys—as much as I enjoy watching Michael Arrington squirm. My point is that for all the talk about how much harder it is for a Westerner to do business in China, in a lot of industries there are far fewer barriers to entry than anywhere else I’ve seen in the world. And – huge 1.3 billion person domestic market aside—that’s what is making China such a Mecca for scrappy, pioneering entrepreneurs right now. You may find Sloan’s ventures distasteful, indeed he says his mother still changes the subject when friends ask what her son does for a living. But change the nature of what he’s selling and Sloan thinks just like any good entrepreneur pushing the boundaries in any pioneering market.

We like to think that outsourcing manufacturing to China or call centers to India revolutionized American business. But America hasn’t seen anything like the truly flattened, profitable, deconstructed and then ingeniously reconstructed businesses I’ve seen in China in the last few weeks.

People who say China is all about outsourcing the supply chain and not innovation have it backwards—the deconstructed supply chain is precisely what’s opened China up to a world of innovation. Imagine the way the Web democratized media and content and now apply the same ability to break a staid practice into Lego-like pieces to any physical hard goods industry whether its sex toys or iPods or pharmaceuticals.

We’ve only seen the first few innings of what this means for global business and smart entrepreneurs in China – whether expats or locals—have the advantage.

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But University of San Francisco associate professor of entrepreneurship Mark Cannice puts a bit more stock in what VCs say. And to be fair, he’s got some data to prove it. While there are tons of studies that track what VCs did in a quarter, for the last six years Cannice has polled nearly 40 local VCs to ask how confident they feel about the high growth industry in the next six to 18 months. And interestingly, the results almost always presage an upturn or a downturn in exits by a quarter.

For instance, the fourth quarter of 2007 was a banner 90 days for IPOs, but the confidence index plunged. Sure enough, the market plunged in early 2008. Similarly, in the first quarter of 2009, returns sucked, but confidence ticked back up. And in the second quarter we got five venture-backed IPOs.

USF just released the third quarter numbers and for the first time since Cannice started the survey the measure of confidence was exactly the same as the previous quarter—down to the hundredth decimal place. Confidence was pegged at 3.37 on a scale of zero to five.

So what does that mean? In short, they’re still confident, but waiting for that confidence to be backed up by reality.

Here’s the good: VCs still feel there’s a lot of good new companies out there, and they know that to make returns ten years from now, they have to keep the dollars flowing now, according to the survey. What’s more: There are more private tech companies with more than $50 million in annual revenues that haven’t yet exited than ever before. It’s a combo of some dot com survivors whose markets finally caught up with their original hype and some surging newer companies. Both are either having a hard time going public in stock market that ignores mid-cap companies or are run by CEOs that just don’t want to go public in a short-term, Sarbanes Oxley world.

Here’s the bad: VCs essentially have two “customers” and both are cautious buyers of what VCs are selling right now. One are the LPs, who despite the recovering public markets are way over-allocated in illiquid venture capital funds and—whether they believe in the asset class long term or not—they’re being forced to sell stakes or at a minimum curtail investing in the next cycle of funds.

And then there are the markets. There are a backlog of IPO candidates, but they’re largely not big multi-billion offerings that can go anytime. And like we’ve seen with OpenTable, with small deals the floats are modest enough that even if a company gets out, VCs being able to sell their shares without tanking the stock is another matter. As one VC said in the survey comments, “The IPO market is like Hotel California. You can check it but you can’t check out.” Let’s remember: The point of an IPO is to make illiquid shares liquid. If you can’t sell, the corks stay in the champagne.

Sure there’s a lot of optimism about acquisition markets heating up. But– while a positive– those deals aren’t likely to be outsized without the threat that the private companies could go public instead.

A lot of people criticize VCs for tailoring their investing mood based on what the broader markets are doing. Should you really be taking cues from the public markets when you’re supposed to be focused on funding startups? But as Cannice correctly points out, it’s a circle-of-life thing. If VCs can’t spin mature companies off to buyers or public market investors, they have to keep more reserves for them that can’t go to new deals. And without those exits—some firms may not be able to raise their next funds, which also hurts their ability to do new deals.

That means a lot is hinging on the next few quarters and whether this coming IPO boom materializes.

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Annoyingly, Huh is also running around San Francisco this week doing all kinds of media interviews. But here are some things I pried out of him yesterday that you may not know.

A word first about Huh: People almost always open an interview by asking if he has cats or if he’s always been funny, which misses the point of what he loves about his job. Huh is a businessman. Unlike a lot of media entrepreneurs, he says his job has become more fun the larger the staff, the site, and the operational worries have grown.

People frequently forget that Huh actually acquired I Can Has Cheezburger? and the FAIL Blog—he didn’t start them. (More on that purchase price below…) Since then he’s opened dozens of humor sites, about 50% of which fail, but some grow spectacularly fast, proving that LOLCats wasn’t a fluke and that Huh has an eye for what makes something funny in that specific viral sort of Internet way. Right now, he’s got a spreadsheet of 150 ideas that he’s moving around, honing and assigning to a team of writers who each curate about five blogs each.

Simply put, Huh has built a serious company out of something inherently hard to take seriously. As he frequently says, it shouldn’t work, but it does.

Now, some details I pried out of Huh with the allure of coffee and a breakfast sandwich yesterday:

1. That I Can Has Cheezburger? purchase price was probably lower than the $2 million Time and others (ahem) reported. Huh is unflappably mum on what he spent, but he’s too good a business man to have ponied up that much—even as fast as the profitable site was growing. Plus, regulatory filings show his angel round he raised to buy that blog and build a company around it was just $2.25 million. When I asked why he’d spend almost the entire amount on one acquisition, he didn’t so much nod, answer or agree as make a face that said “Yes, thank you for not assuming I’m a total idiot.” But, yeah, he won’t comment.

2. Huh has really studied what makes humor catch and made an interesting observation: Male sites and female sites grow distinctly differently. Men tend to share by gut instinct, so male oriented sites grow faster but can churn users quickly too. Women are more trust-oriented, says Huh. That means they share links and sites less frequently, but with more credibility. So the sites grow slower but maintain their audiences better.

It’s an interesting observation given how much of the early breakout Web 2.0 were so male dominated, and Huh should know seeing the traffic patterns of Hawtness (slightly NSFW) and LovelyListing. (Guess which one is for men?)

For the record I Can Has Cheezburger? is about 50%-50% male-female, but nearly 100% geeks-who-love-cats, both of which have aided huge and sustained growth. As Huh explains it, dog people go to parks, cat people sit inside on computers.

3. Just how good that traffic is. The Pet Holdings Network boasts 12 million uniques a month and does 1 billion page views every four months. Those numbers are astounding for a 26-person, user generated content company built largely on frivolity.

We all know about Cheezburger, which surpassed 1 billion page views last month. But FAIL blog went from zero to 10 million page views-per-month in just 90 days, and the recently launched ThereIFixedIt.com has matched that pace.

That said, Huh doesn’t hugely care how fast a blog grows, as long as it grows. What gets one of his sites shut down is a huge spike and then a fall.

His newest site, NotVeryTalented.com launches on Friday.

4. Revenues. Huh has done a great job making money in tough industries. While a lot of blogs are sputtering, his have 30% margins, posting CPMs anywhere between 15 cents and $8. The least profitable is clearly Hawtness, which Huh doesn’t even try to sell ads on, given the dodgy inventory. “It just hooks in readers,” he says.

Here’s the shocker: The company also makes 30% margins from book publishing deals, and advances and royalties make up nearly a third of the company’s revenues, which are in the “single digit millions.” More shocking: Huh can’t seem to get a publisher to sign him to a multi-book deal. This despite the fact that the first LOLcats book spent 13 weeks on the New York Times Bestseller List. Really, New York publishing houses?

Huh plans on releasing six books next year and – SPOILER ALERT- the third LOLCats book will be all about kittens.

5. Huh has a social network too. Even if you knew all of the above, this one must surprise you because it recently surprised Huh. Pet Holdings has long offered a log-in and profile for contributors who regularly post images and passively given them the ability to friend each other. The result? A niche social network with 1.3 million users. Huh hasn’t quite decided what to do with this revelation, but he’s thinking about it. As comparatively well as he’s done with blog ads and book sales, to really scale the company, he’d like a sexier revenue stream that can grow fast without massively growing content.

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But if you dig a little deeper into that dating site, you start to understand how differently Li thinks, and how that thinking reflects an aspect of Chinese consumer Web sites that Westerners frequently miss. Where Chinese Web entrepreneurs shine is in taking an existing business idea – ripping it off, if you like – but then completely rethinking and reinventing that idea’s business model and process. This not only makes the companies more profitable faster, it’s a big reason why home-grown Chinese versions continually beat US companies trying to expand into China.

To a Valley entrepreneur taking someone else’s idea, improving on it and taking all the credit may seem unfair or even unethical. But Google didn’t come up with the search engine and Facebook didn’t come up with a social network. What mattered was execution. Put another way: Sure the Chinese can learn a thing or two about original Web ideas from the Valley, but the Web 2.0 generation can learn a lot about monetization from China.

So what does a Chinese Match.com look like? In Li’s own words, it’s very “practical.” China has a long history of matchmaking so just going online, finding someone you like and messaging them isn’t going to appeal to a lot of the population. The ones who are comfortable with doing that will just use social networks. For those who aren’t, there are already an established off-line alternative in some 200,000 very local, fragmented companies that specialize in matchmaking, charging anywhere between 2,000 and 60,000 RMB per six months—depending on the service. Even in comparatively cheap China, they’ve got pretty high customer acquisition costs thanks to all that brick and mortar and heavy placement of classified ads to keep bringing in new singles.

That’s where the Web should come in, but it’s a bit trickier than that. Here’s the rub in China: The entire consumer Internet—along with “old world” industries like consumer packaged goods and entertainment—are all growing and developing at in parallel. In the US, you could argue social networks are the Web 2.0 answer to the Web 1.0 online dating sites. But how do you build a profitable online dating company in a world where a million MySpace and Facebook rip-offs already exist?

Li has struck an interesting middle ground: A Web site that’s free to join and free to search, with revenues provided by a 350-person strong call center of real-life matchmakers. Once you find someone on the site you like you place a call to a matchmaker to be set up on a date. Using the service costs 3,000 RMB (roughly $430 in dollars) for a six-month subscription—about the low-end of a traditional matchmaking service – and at least one person going on the date has to be a paid subscriber. The matchmaker determines whether both people want to go on the dates, or suggests an alternative date from amongst the site’s 22 million registered members (growing by 40,000 per day). The matchmaker then sets up the date, and then follows up afterwards.

The matchmaker isn’t your friend—she is doing a job. If you suggest someone out of your league, they might, ahem, guide your expectations. “We just want you to be realistic,” Li says. And in the event of a rejection, Li’s team asks a detailed questionnaire to determine exactly why one party didn’t want a second date. And then they call the other party to explain – in precise detail – where they went wrong. “At least you know why and there are certain things you can fix next time,” he says. It may sound brutal but it gives the service clear value. Zhenai.com is profitable, generating about $2 million in revenues per month, growing at double-digit rates month-over-month.

It may also sound like labor-powered, innovation-free China, but it’s not. Li has built a specific CRM system from scratch to walk matchmakers through the matching process and he’s hired a psychologist to help train them on what questions to ask, and what to say to the lovelorn. Li himself has a PHD in finance from Cornell, where he also studied evolutionary biology and molecular genetics.

And then there’s the statistics. Not even Max Levchin—the PayPal and Slide founder who has graphed everything down to his past girlfriends’ bra sizes over time— could match Li’s love for charts and stats. All those brutally honest conversations about why dates succeeded or failed have turned into a trove of statistical data that matchmakers turn into pre-date advice.

A random example? 60% of women with long, straight hair get second dates—even when the data is normalized for Chinese women being more likely to have long, straight hair. The worst group? Short curly hair, which has only a 5% second-date percentage. (Note to self: Good thing I’m married.) “We’re not telling them what to do, we’re just giving them information,” Li says matter-of-factly. Men also like black pantyhose and shiny color-less nail polish. (Li blushes a bit when he tells me about the pantyhose.)

Li has also found that men are universally attracted to women with a .7 hip-to-waist ratio—something he believes is genetically hard-coded as a reproductive trait. “I can’t do anything if a woman is fat, but I can tell her to dress so it shows off her waist,” he says dispassionately. It works both ways, by the way. Women prefer dates wear a suit and because women are predisposed to look for “good providers” Li says he can track for every extra 1,000 RMB you make a month, statistically what percentage more attractive you will be to an average woman. “It’s a math fact,” he says. “I can build you a model.”

It bears noting that Li is not some fratty chauvinist pig. He’s a brainy, bespectacled former derivatives trading executive on Wall Street and Hong Kong, and, yes, he is married. He just likes to break things down into numbers and trends in an obsessive attempt to quantify the seemingly qualitative behavioral patterns of it all. And that makes him the exact opposite of any US consumer site trying to blindly “localize” a site for the Chinese market by just changing the language.

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Inauthentic? Tell me more.

Twenty-nine year old Zhang, who has lived exactly half of his life in China, is a ringleader of a brat pack of smart, well-schooled Beijing expats working in everything from media to tech to education. I’ve twice run into him and a giant gang of friends in the Beijing nightlife scene. Said someone the last time, “Oh, everybody knows Yan.”

They genuinely work hard and most have studied in Asian history and Mandarin. What’s more these aren’t the expats of old with rich, corporate relocation packages. Most decided to move here first and figured out what they’d do second—even if many of them have family money that pays the bills in the meantime.

But many nights they also play hard—and usually just with other expats. (Ahem, see video here. That’s Zhang at the end.) They toss back drinks at Manhatten-esque nighclubs and British-style pub quizzes. I’m not judging. It sounds a lot like what I do with friends in San Francisco, truth be told. But I didn’t relocate to experience China either.

“Are we living the Chinese experience? Not really,” Zhang said. “But neither are expats who live on a Hutong and also go out with other Americans at night.”

But unlike a lot of gadfly expats I’ve met in two trips to China, Zhang is building a real company. He’s been at it for two years. It’s actually aimed at the Chinese market, while a lot of expats just seek to leverage China’s workforce. And it’s not a U.S. copycat site. In fact, it’s a site that wouldn’t work in the US.

Zhang’s company is Meiloo.com, a site that helps Chinese Internet users find, source and compare doctors and hospitals for elective surgery. It’s not one of those Silicon Valley thank-God-the-URL-wasn’t-taken, nonsense word companies. It means “happy and beautiful.”

Elective health care services are a $10 billion a year market in China that already heavily advertises on TV, billboards and the Web. Elective medicine doesn’t just refer to things like plastic surgery here, but also to preventive care like annual physicals and dental check-ups. And unlike in the United States, where HMOs and private insurance companies own or control much of the market, in China’s growing, fragmented market finding a good doctor for a good price is, well, a lot like the challenges in comparing and sourcing travel in the pre-Web days, Zhang says.

Will the whole Chinese market jump to use Meiloo? No. But Zhang points out that Chinese travel site Ctrip taps less than 10% of the domestic travel market and is a multi-billion company. And Meiloo’s 15% cut of any service or surgery booked online can add up a lot faster. Plus, the demographics will increasingly work in Meiloo’s favor. The largest base of Chinese Internet users were born in the 1980s, and increasingly that audience is aging and will want – and be able to afford—dental work, plastic surgery, and laser eye surgery that government plans don’t cover. In fact, government health care doesn’t even cover annual physicals.

Meiloo is growing transactions at a pace of 15%-25% per month, and has helped book nearly $1 million US dollars in transactions in the last twelve months. Those numbers aren’t massive. But the biggest victory, according to Zhang, is that patients don’t use the system for research and then go around it to actually book services, and that doctors and hospitals actually pay Meiloo’s cut. 90% of Meiloo’s account receivables are resolved in sixty days. “We’ve worked to align everyone’s interest,” he says. “That’s the key to doing business in China.” So far there are 330 clinics on the system and 1,100 doctors listed. A lot, but a drop in the bucket by Chinese standards.

There are two other things I like about Meiloo. One: Zhang’s co-founder Jeffrey Wu (right in the picture above) isn’t your typical smart engineer plucked out of a top Chinese school. Within six years he went from a drop-out running a bar in Shanghai to the CTO of DangDang, one of China’s largest e-commerce companies. In my interview with Kai-Fu Lee earlier this week, he noted that all multinationals use universities as a hiring filter and admitted it’s not always the best or most fair way to find talent. Wu’s story proves it. I have a feeling that scrappy gray area is where many of China’s best entrepreneurs will come from in future years.

Two: So far, Wu and Zhang have bootstrapped the company, taking only modest funding from a group of angels in California. Zhang let it slip that he’s going to the Valley in early November. Given his anxious behavior as I asked more and more questions about the trip, I wouldn’t be surprised if a Valley funding round is on the horizon for the young company.

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So imagine my expectations when I set out to see BYD’s “Village of the Future.” BYD—for those who don’t know—is a Chinese powerhouse of battery innovation with more than 130,000 employees, roughly 10% of whom work in R&D. The company is a living, breathing reality check to Westerners who think Southern China is merely a hub for assembling the technology U.S. designs. My BYD guide told me that the company gets at least one member of Western media coming through the office a week, many of them shocked that a Chinese company could be so innovative.

In recent years, BYD’s founder Wang Chuan-Fu has leveraged an un-sexy expertise in lithium electronics batteries into an electric car business. And, now, the company is harnessing that same technology to make solar panels that can efficiently store solar energy and manage it. It’s impressive enough stuff that Warren Buffett paid $230 million for 10% of the company in 2008, spurring every major media organization to start taking BYD seriously. (According to a great article in Fortune, he wanted even more.)

But you want futurism? Go somewhere else. This house of tomorrow—totally powered by solar power and piped with recycled rain water—looks just like any suburban house in the world. (See picture above. Yep. That’s it.) Turn on the tap and it’s just like turning it on at home. The air conditioning sounds and feels like the AC in my hotel. The company uses the top of the concept house for executive meetings. The conference rooms only stand out in their unremarkableness.

And, while it may make for uninteresting photos, that’s what makes BYD so impressive, and part of what would attract someone like Buffett to break the same cardinal rules of investing that convinced him to avoid the late 1990s dot com mania: Stay away from what you don’t understand. When my guide was taking me through BYD’s “museum” of its products, she waved her hnad dismissively at a sexy electric convertible, saying the ho-hum practical sedan was the company’s best-seller. What sells in a country where millions are scrambling into the middle class is practicality, not sex appeal.

Similarly, BYD’s house of the future is steeped in practicality, not look-at-me tree hugging or science fiction. That’s something that could actually make a difference for the solar industry and for smoggy, energy-guzzling China.

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He called the landlord and told him he’d take as much as he’d give him. And now he’s in the next office on the same floor, hoping a Chinese version of Larry or Sergey walks through his door.

As we reported a few weeks ago, Lee is also taking a few Google China staff members and indirectly some of that Google cash in the form of an investment from YouTube founder Steve Chen, among others.

His new venture is called Innovation Works, and it’s a sort of angel fund/incubator to help encourage Chinese entrepreneurs to eschew staid-but-prestigious corporate tech life and start a company instead. I met with Lee this week at his new digs in Beijing and so far, they’re pretty empty. There are a few analysts and engineers huddled by the door, near a table overflowing with different kinds of tea that people have given Lee as a good luck gesture in starting this new venture. (There’s so much tea, in fact, he insisted on my taking a tin.)

That elbow room won’t last: Lee got 7,000 resumes on his first day of business and has gotten some 40,000 total. It’s taking a while to plow through them, but he expects to hire at least 100 more people in the coming months. In fact, between our meeting Monday morning and sharing some Peking Duck later that night, he made four hires. (I shot a quick video with Lee talking more about Innovation Works. Unfortunately, my Flip has died for good, and it’s gone. So text will have to suffice.)

Lee is that rare unicorn-of-a-specimen that Silicon Valley companies and investors salivate over: He’s held key product and management roles at Apple, SGI, Microsoft and Google building a deep bench of respect and contacts in the inner circle of the U.S. tech business, but he’s also a hero to many young techies in China.

Want an example of the former? Back in the late 1990s, the product line he’d developed for SGI was struggling and being sold off to a company that would later be bought by Computer Associates.

That ultimately meant Lee was looking for a new job. His father—a Taiwanese diplomat—had asked Lee on his deathbed to return to China one day, and a job with Microsoft was making that promise a reality.

Lee had decided to take it, but few people knew yet. He went home one day and his wife said, “Steve from Apple wants you to call.” Lee mentally paged through the Steves he’d worked for at Apple—never thinking of the obvious one. Lee had worked at Apple during the bleak years before CEO Steve Jobs returned to the company, or as Lee likes to say, “I was at Apple between Jobs.”

“I think it was Steve Jobs,” his wife said of the caller. Lee insisted it couldn’t be true, since he’d never even met him, but called the number back all the same. It was Jobs and he personally asked Lee to come back to Apple. Lee demurred.

“I know you’re going to work for Microsoft in China,” Jobs said. Lee was stunned. Almost no one knew. For a moment he must have thought his-iPhone-ness really was as all-powerful as the fanbois say. Then Jobs added, “Your wife told me.” When Lee asked why she divulged the closely-held secret she shrugged and said Jobs was so nice on the phone, she assumed he was one of Lee’s close friends.

Lee resisted Jobs, and you could argue missed out on the golden era of Apple as a result. But the Microsoft job meant that Lee was also an early multinational tech manager in China. Since then, between Microsoft and Google he’s given fat incomes and prestige to hundreds of Chinese entrepreneurs, building quite a following in China. (At dinner a young woman shyly came over and asked for his autograph.)

To be fair, Lee has his detractors in China too. Critics question whether the longtime corporate executive has the chops to pick and fund truly innovative ideas. After all, Lee himself said in our interview a few weeks ago that executives at multinationals typically don’t have the hunger to be great entrepreneurs. Others say he’s one of those bridge-builders between East and West that benefits by talking up business in China as being more complex than it really is.

After one meeting and one dinner, I can’t say whether either of those complaints are fair. But after spending several weeks in China in the last few months I will say this: If his well-cultivated reputation convinces more Chinese entrepreneurs to start businesses, that’s good for China and the tech world globally.

(Image of Lee courtesy of Abondance)

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But with the benefit of hindsight, Dogster has done two things very, very right: It never raised venture funding and never relied on an ad network for revenues.  The result is its network of sites– Dogster, Catster and Snuzzy– that focused on maximizing revenues early on instead of aiming for user growth for the sake of user growth. While many other Web 2.0 names are struggling to raise more money to stay in business, Dogster has been profitable since the second quarter of 2007 and is solidly in control of its own destiny. (Full disclosure: Michael Arrington was a very early angel investor. His statement about his investments is here.)

Not only that—premium ad sales for the sites are up 20% this year. Why? Because while hot sites like Digg and Facebook outsourced ads to big players like Microsoft and smaller sites outsourced them to Google, Dogster has invested five years in building direct relationships with big pet food, supply and other consumer packaged good brands. “We figured each $50,000 ad deal was like getting another angel investor,” says Ted Rheingold, Dogster CEO.

These aren’t lame banners. These are coupons, contests and other things that incent users to interact with the brand. A recent example was a coupon from Royal Canin Cat Food. The company was hoping for 500 takers and it got 5,000. As a result Dogster and Catster charge $10-$12 CPMs and as high as $40 CPMs for their newsletter. (I interviewed Rheingold about this strategy back when I was co-hosting TechTicker. The clip is below.)

But there’s a problem. Dogster is still a small site and even happy advertisers will only continue to pay so much to reach the same users. So Dogster has solved that by deciding to become in essence the thing that it always argued startups shouldn’t work with: Ad resellers.

Dogster will now sell ads for the much larger Cheezburger Network of Lolanimal-related sites that include IHasaHotdog and ICanHazCheezburger—a never-ending meme that will hit one billion page views later this week. “That’s 10 billion cat pictures served,” says founder Ben Huh. “At 72 pixels per inch, if you laid them out end-to-end it would reach the moon and back four times.” (I’m guessing that moon part is actually true. Huh also told me that under the new deal every time they sold an ad, Dogster would ship them a free dog.)

The two have just closed their first sale to Clorox for Fresh Step Kitty Litter. Sexy? Maybe not. But it’s lucrative. But Dogster is no longer in the one million-unique category, it’s selling for six million uniques and until the CPM dies, this is still a volume industry. Neither company would comment much on the economics, but Dogster is taking a smaller cut than a traditional ad network would. In exchange, Cheezburger Networks has to do more work to make sure the ads are effective, whether it’s creating a contest or just tracking the metrics the way Dogster already does in house.

It’s an interesting announcement, since ICanHazCheezburger is so much larger and better known. Typically it’s the smaller site that outsources inventory to the giant. But the founders Huh and Rheingold were long time friends who’d frequently ask each other’s advice: Rheingold would ask how Huh got those gaudy user numbers and Huh would ask how on earth Rheingold was so good at monetization. Looks like the two will now be able to actually share those areas of expertise: Dogster now gets a network of six million uniques and Huh gets much higher revenues.

Neither of the deals is exclusive. Dogster plans to add more complementary sites to its ad inventory and Cheezburger Networks plans to ink similar partnerships for properties with non-pet user profiles like the FailBlog and newly launched ItMadeMyDay.com—which has already hit one million page views.

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Think of all the online fame that’s been created in the last few years amid this hype of the Web democratizing celebrity. Now try to name how many of them crossed over to mainstream popularity. Tila Tequila got an MTV show and a record deal. LonelyGirl15 is on ABC Family’s Greek. And…the list dwindles from there. Amanda Congdon’s “talks” with HBO never seemed to materialize. Kudos to Julia Allison for snagging a Wired cover and starting a lifecasting site, Nonsociety, but that Bravo pilot never saw the light of day and even Gawker doesn’t cover her much anymore. (She may consider that a blessing.) The people who get the most press for using social media are still, well, the real celebrities like Oprah and Ashton Kutcher.

It’s enough to make you a cynic that celebrity isn’t really getting democratized at all—it’s just getting fragmented into slivers of micro-fame. And the truth is so far micro-fame doesn’t pay.

Enter an unlikely Internet fame winner: Zoe Keating. Keating is an avant garde cellist and that is her day job. She has no label. No agents. Nothing. Just 1,081,522 Twitter followers (and counting), the number one spot on iTunes classical music list, YouTube videos of her performances and a Web site.

Keating was on NBC’s Press:Here along with Pandora co-founder Tim Westergren this week. While Westergren left the music world to start a tech company, Keating left a high-paying tech job to become a full time cellist. Her music has been featured in film scores and commercials, but she makes the bulk of her income from iTunes. And because she doesn’t have any “people,” she gets to keep every dime. It’s an interesting flip from the mainstream model where studios make money off music sales and artists only make money when they tour.

Keating also doesn’t have the normal hang-ups of a prima donna musician. I asked her if she had the usual anti-corporate bias against her music being used to advertise products and she looked at me like I was mental. (See the clip below. The entire show is available here.) In short, she gets that the model for musicians is thoroughly broken and she revels in it. I asked if she would take a huge record deal if it came to her now and she said “no” before I could finish the question. “I would definitely do it myself because I don’t want to compromise,” she said.

This is all the more impressive when you consider she’s a classical musician—not exactly a category that flies off the shelves. Or is that part of why it worked? You don’t exactly see classical musicians on MTV’s Cribs squandering multi-million signing bonuses. So someone like Keating would have to find another way to make a living making music.

Keating says she spends 50% of her time managing and promoting her music and 50% actually making music. She also emphasized this was a long struggle to get to this point.

Lesson to would be fame seekers: It’s not really a new world when it comes to celebrity. There are no shortcuts. It’s still talent, perseverance and hard work. Even the speed and reach of the Net can’t create lasting value and income overnight.

[More on all of this on Keating's blog.]

[PHOTO CREDIT: Jeffrey Rusch.]

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And that’s worked to Pandora’s advantage. Westergren did such a good job of warning the site’s rabid fans that the RIAA may be running it out of business that those fans actually broke fax machines on Capitol Hill with complaints. Westergren gets what a lot of entrepreneurs don’t: It’s about survival, not ego. That’s especially true when you’re an online music company.

Of course, today Pandora is sitting pretty thanks to a hard work and a serendipitous one-two-three punch. Punch one: The iPhone app, which changed the nature of Internet radio by making it mobile. Punch two: A nice $35 million round of funding from top investors. Punch three: Finally a reasonable settlement from the RIAA.

Pandora has 35 million registered users (double what it had last year), it’s bringing in some $40 million in revenues and should be profitable by the end of the year, said Westergren on NBC’s Press:Here. (The show airs Sunday, but you can watch it online now.)

Most interesting were Westergren’s comments about advertising. As you can see in the clip below, the show’s host, Scott McGrew, and my co-panelist, NPR’s Laura Sydell, claim to be huge Pandora fans but couldn’t seem to remember hearing many ads. Said Westergren: That means we’re doing it right.

He said when he talks to Pandora users they always say they don’t hear many ads, and they don’t think they interact with the site much. In reality, users are hearing a good number of ads and most go to the site six times per hour to thumb up and down ads, where they get served another visual ad. “[Users] are always shocked to hear the actual data,” he said after the taping. “I think it’s because the interaction doesn’t feel like work. It’s a natural instinct tied to the ability to affect the listening, and it’s rewarding.” He added that click-through rates are way above industry average, which he credits to knowing each user’s taste so well. Depending on the product it can be ten times greater than the industry average.

Pandora also has more creative ways of advertising. Westergren also talked off camera about a recent gig in LA for Aimee Mann. Pandora sent an email to users in driving distance of the club that it knew loved her music and the venue quickly filled up. “Can we do this every night?” the club owner panted.

Pandora didn’t charge the club anything for this, but there’s clear opportunity to do so. This kind of promotion plays directly to Pandora’s strengths especially now that it’s on iPhones, Palm Pre and Android. While people gush today about Spotify’s ability to play your music on any device and its a beautiful UI, Pandora’s offering has always been about discovery. The heart of it is the “Music Genome Project,” which analyzes why you like a song and gives recommendations based on the song’s inherent characteristics, not what other people who liked that song also enjoy.

If it can translate that to the physical world of gigs, it could do for venue owners and artists what Travelocity and Expedia first did for airlines—fill empty seats that are worthless once a gig is over. That’s not only an “ad” that has value, it’s one that actually uses the unique interactive elements of the mobile Web. “This is the part of Pandora’s future that I’m most excited about,” Westergren said. “I wish they had this when I was in a band!”

Pandora may just be hitting on that much-talked-about but mostly elusive online advertising Holy Grail: Ads that users actually want. If they pull it off, and avoid the far-too-crowded online music graveyard, Pandora will be a textbook case for why execution matters more than vision in tech.

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Techies who did follow the conference likely did so through the tweets and TwitPics of eBay founder Pierre Omidyar. After founding one of the biggest successes in Silicon Valley history Omidyar bucked the serial entrepreneur trend and turned to angel investing and do-gooding. At the conference he announced another big move: His philanthropic investment firm, The Omidyar Network, is committing  $30 million towards backing high-impact entrepreneurs in emerging markets, specifically Sub-Saharan Africa and India.

It’s an interesting fill-the-gap strategy between mainstream venture capitalists looking to benefit from the emerging world’s booming demographics but frequently stymied by cultural and logistical challenges and micro-loans, which the Omidyar Network has already done a good deal of in these regions.

VCs look for companies that could be worth hundred of millions or even billions of dollars and a lot of the infrastructure for that kind of growth like management teams, attorneys and the like are still lacking in many emerging economies. The result is the bulk of  US investments for emerging markets goes to China, and a smaller but still substantial amount to India and not a lot in the rest of the world. On the other end of the scale, micro-loans are frequently aimed at lifting individuals out of poverty by funding a trade, not an entrepreneur building a business that could serve hundreds of thousands or millions of the world’s poor.

Omidyar’s $30 million investment is a step in between. These will be investments, loans and sometimes grants for entrepreneurs looking to build high-growth, high-impact ventures that can have an out-sized affect on the poverty stricken region where some 10 million people live on $2 or $3 a day.

I grabbed Omidyar and managing partner Matt Bannick  for a quick call in between their elevator rides with the former President of Nigeria and hitting up Ted Turner for business advice. I asked them the question that would-be-backers of my own book on global entrepreneurship asked me when I was selling it: Why should we care about entrepreneurship in Africa and India, when we can’t even fix poverty-stricken areas of the United States like Detroit?

“We think while everyone may have been born equal they don’t have access to equal opportunities and the greatest disparity is in the developing world,” Omidyar said. “That’s also the most vastly growing population and the place where we can have the greatest impact.”

And certainly $30 million goes a lot farther in the poorest areas of Africa and India than it does in the U.S. But the core point Omidyar added last: “This will have a huge impact on humanity overall. If you’re an American, you’re going to benefit from this.”

Let’s ignore altruism for a minute. There’s the self-interested humanitarian case that the more stable emerging economies with exploding populations become, the greater the likelihood they’ll form stable governments, or even adopt free-market economies. But there’s also the self-interested business case: The reality is the world’s economic growth is no longer happening in the U.S.. It’s happening in India, China, Africa, Russia, Indonesia, Brazil and a host of other smaller countries. There is innovation and entrepreneurship already there. Billion dollar companies will be formed. The question is, does America and the Valley want to play a role in that?

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Web visionaries like Reid Hoffman and Sean Parker struggled to come up with positive feedback on stage. Robert “I-get-excited-by-nearly-any-start-up” Scoble was so bored he was playing Hangman via Twitter with Paul Carr. Marc Andreessen praised Udorse—a company that he joked would make the world a worse place if it succeeded—because at least it was a new idea. Tim O’Reilly said he didn’t care whether Cocodot, one of the companies he judged, succeeded or failed because it was so meaningless in the world. And Tony Hsieh just said it blatantly: “I didn’t see anything that was trying to change the world.”

One big exception was CitySourced—a company that excited Kevin Rose precisely because it was trying to build something that doesn’t really exist today and would make a huge difference in people’s lives. It was the most excited I saw an expert about anything over the two-day event.

I don’t say this to knock the conference or the selections we made. But the truth is I heard it too consistently backstage to ignore it. To be fair, we’re at that point in the start-up cycle where this is to be expected. Web 2.0 start-ups that are going to break out mostly have and others are running out of time and money. With fatigue setting in around the Valley, most new companies are looking to play it safe. We saw the exact same thing in 2001-2002. Then and now, press outlets compliment this type of thing as “sensibility” or being smart. Jeering ledes get written with told-you-so lines like “Remember profits, Silicon Valley?”

Those people just don’t understand the Valley and what makes great start-ups great. They’re the same people who write about Facebook and Twitter once the companies have raised loads of money and gotten huge audiences. The people who extol the virtues of “sensibility” are never the people at the core of the next great companies. Whether press or VCs, they’ll be late to the next wave, just like they were too late to this one. But the experts at our conference do get it and that’s why they left mostly un-wowed.

Here’s why this matters: Start-ups by definition don’t have the experience, market position, funding or resources to tackle obvious market opportunities. If what they’re trying to do makes clear business sense, a bigger, better-positioned company would do it. A start-up’s only edge is that it’s not built into legacy businesses and preconceived notions and can do something, well, crazy.

There are entrepreneurs somewhere building the next big companies. But it’s probably just a wonky side-project that no one—not even the entrepreneur himself—realizes is the next big thing. That’s who we need to drag on stage next year.

Ten years from now I don’t want to look back on TechCrunch50 and see that our winners had a string of $100 million exits. For a conference that seeks to ferret out the most exciting startups in the world, that’s failure. I want to see huge audacious failures and huge gaudy wins. I worry if we play it too safe as a conference we’ll lose the attention of the Andreessens, the Hsiehs, the Tim O’Reillys and the Reid Hoffmans and eventually, the audience that stayed glued to their uncomfortable seats even in the event’s final hours hoping to see something that could change their lives.

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So you don’t need a bunch of words from me, just go to the jump and watch our final backstage interview of the conference where Hoffman talks about whether LinkedIn will buy Xing and whether it’ll file to go public this year.

Also, Hoffman names the three other tech companies he thinks can price pretty much whenever they want. (And lucky him, he’s an investor in two.)

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So lucky for us that some of the most influential and interesting judges were left for the final panel. I caught up with one of my favorites, Dick Costolo, who most people know as the new COO of Twitter, others know as the former co-founder of Feedburner and far fewers know as a former improv comedian.

Costolo and I talked about why he gave up a plush post-acquisition Chicago life to move to Silicon Valley and run the day-to-day Twitter operations, when it’s a good idea to hire your friends and when it isn’t, Twitter’s magic acquisition number, and why startup M&A is like teenage crushes.

Also, Twitter CEO Evan Williams has been outspoken about not enjoying his time at Google after the Blogger acquisition. Others have cited that as a reason Twitter may not sell to Google in the future. I asked Costolo whether he had the same experience.

Video is on the jump.

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O’Reilly is a consummate thought leader in the Valley so the interview is interesting for anyone. But if you’re planning on actually pitching O’Reilly on anything this is required viewing.

Oh, he also explains what he and the Cookie Monster have in common. Video is on the jump. (Sorry for the abrupt edits. Trying to keep these interviews on the short-side.)

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We also talk about Affective Interfaces, a TC50 company that got mixed reviews from the judges this morning, but one of Horowitz’s favorites of the day.

Clip on the jump.

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This video is longer than most of our behind-the-scenes glimpses, but we covered a lot of territory. Rose tells us the single most important product move Digg has made in the last year, whether his company is worried about the Twitter threat, what’s coming next for Digg, his favorite company that launched today (HINT: CitySourced founders may have a potential angel investor), and whether or not starting Pownce was a mistake.

Video is on the jump.

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Question one: Palm is really paying companies to write apps for the Pre? Yes. How much? All I got despite truly obnoxious questioning was “under $500,000.” (If you’re a developer and you have a better answer, leave it in the comments or send to tips@techcrunch.com.)

We also talked about the biggest execution risk: Whether or not cities will actually use this data to make citizen’s lives better? Gavin Newsom: I hope you’re paying attention to this.

Video is on the jump. (Sorry for the jumpy camera work. It’s still early here.)

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I pressed Hsieh on details about his relationship with Jeff Bezos and Amazon. He can’t really comment because the US Justice Department hasn’t yet ruled on the deal, but he did admit “I’ve always thought Jeff was a lovely man.” So that’s how it works in that soon-to-be corporate family.

The most interesting admission may be his advice for start-ups: Do you really need venture capital?

TC50 and Tony Hsieh from sarah lacy on Vimeo.

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“Four or five of our companies could go public,” he says in the interview after the jump and names some names. (He also does the cutest face ever at minute marker 3:28. Jim Carrey meets one of Jason’s puppies?)

This is a longer video, but it’s one of my favorites I shot all day. Stay until the end where he tells start-ups how to market themselves to customers and investors in a downturn.

TC50 and Paul Graham from sarah lacy on Vimeo.

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Andreessen also reiterated what Ron Conway said earlier: There’s no dearth of funding for good start-ups in the Valley. More on why he did that Skype deal and what he’d rather hear TC50 companies talk about in their pitches on the clip.

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