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.

Crunch Network: CrunchBoard because it’s time for you to find a new Job2.0

UnitedDogs.com and UnitedCats.com offers traditional social networking tools such as blogs, profile pages and photo sharing to pet lovers, and is available in English, Russian, German, French, Spanish, Portuguese, Croatian, Dutch, Danish, Estonian, Latvian and Lithuanian. Combined the sites have over 40,000 members, not enough for it to be counted by comScore, although the new Alexa notes that UnitedDogs is a top 1000 site in Luthiana and also scores well in Malaysia and Indonesia.

UnitedDogs.com compares well to competitor PawSpot (our review) in terms of traffic but still lags (or should that be wags…) well behind market leader Dogster.

This is the second investment in United Dogs and Cats by Ambient Sound Investments, having provided an undisclosed Angel Round in October 2007. See also ASI’s May 2007 investment in Freenzo. The additional investment takes ASI’s stake in the company to 18%.

The new money will be used to expand the reach of the UnitedDogs.com and UnitedCats.com.

disclosure: Michael Arrington is an investor in Dogster

Crunch Network: CrunchGear drool over the sexiest new gadgets and hardware.

Clavier, who has a degree in computer science, has been actively investing in startups over the last few years and has had notable successes such as Truveo (acquired by AOL for a rumored $50 million), Userplane (acquired by AOL for a rumored $35 million), MyBlogLog (acquired by Yahoo for $10 million), Kaboodle (acquired by Hearst for a rumored $30-40 million), Mayas Mom (acquired by BabyCenter for $7 million), Dogster, Kongregate, Edgeio and many others. In other words, he has an eye for winners. His investment philosophy will remain much the same, he says. He’s just now investing money from limited partners as well as his own capital.

He says he’ll invest the fund in a total of 30 to 40 seed stage startups with investments ranging from $100k – $500k. SoftTech VC will focus on consumer Internet.

Clavier has made four initial investments through the fund: Satisfaction Unlimited, Social Media Network, Grouply (which will launch at the conference today) and Active Athlete.

Crunch Network: MobileCrunch Mobile Gadgets and Applications, Delivered Daily.

I was one of the investors in the round (and I’ve updated my disclosure statement to reflect that). A few people have asked me why I invested in this company. After all the principal founder, Ted Rheingold, doesn’t even own a pet. And if anything there are simply too many social networks out there today. Most of them will not survive.

I think I made a good investment decision though. Dogster was started on table scraps from a few friends and family of founders Ted Rheingold, John Vars and Steven Reading. These guys kept operations extremely lean from the start, and brought the company to profitability about a year ago, just shy of their two year birthday.

Growth in terms of users, page views and revenue continues to increase aggresively. And while Dogster is still small, the company continues to run on a very tight budget. No money is wasted. They even asked me for a free $200 job listing on Crunchboard. I declined, and they bought it anyway.

Big name advertisers have flocked to the site, including Disney, Target, PetSmart, Clorox/FreshStep, Gap/Old Navy, Warner Brothers, Nintendo and VPI Pet Insurance. The fact that they stay on after an initial test shows that they are getting value for their advertising dollars.

But what I like even more than the business model and growth metrics is the team. The founders are all solid, street-smart entrepreneurs. They recently brought on Jeff Clavier and Scott Rafer as advisers, two people I have a great deal of respect for. And as part of the round Michael Parekh agreed to join the board of directors of the company as well. He’s one of the smartest people I’ve ever met, and that pretty much sealed the deal for me.

As with all companies where we have a conflict of interest, we’ll disclose that when and if we write about Dogster in the future, and we’ll most likely have another writer cover them as well. In the meantime, please visit my dog Laguna’s Dogster page, and consider throwing her a bone or two.

The PawSpot site is still in beta and there aren’t many users yet (Dogster has 260,000 pets and gains about 700 new pets per day). However, it’s also taking a much different approach to serving pet owners than Dogster/Catster.

First, on PawSpot a human profile is included along with a pet profile, and users are encouraged to become “friends”. Dogster does not allow any personal information about a person to be included on their site – its for pets only. However, Dogster also encourages pets to become friends, linking them on the site.

Second, while Dogster focuses on being a showcase for featured pets, a place to show them off, PawSpot seems to be aiming to provide much needed services to pet owners. In particular, arranging for friends to take care of each other’s pets while away on vacation, and finding local dog parks.

For now I’m staying with Dogster. It’s too much trouble to move the page I have up for my dog Laguna over to a new site. Also, Dogster is a refreshing break from other social networks, which always seem to degenerate (by plan or otherwise) into dating sites (well, except for LinkedIn, I guess). The lack of any personal information ensures that.

Dogster is a home page site just for dogs. You can see the page for my dog, Laguna, here as an example. A key part of the site is social interaction among dogs, and Laguna has a number of “friends” that are linked on the page. Dogster also allows tagging of photos, and has just launched a Groups feature (there are already 239 Groups) In general, humans do not interact and you do not know who the dogs’ owners are. For a lot of dog-crazy owners, this is perfect.

Needless to say, Dogster has some pretty loyal users, and the site statistics reflect this:

• Total human members: 153,000+
• Total pet pages: 185,000 (130k dogs, 55k cats)
• Average new pet pages per day: 525
• Page serves December 2005: 10,100,000
• Total photos on the site: 750,000
• Distinct friend-to-friend connections: 5,030,000
• Virtual treats givens: 7,079,000
• Total forum postings: 232,000 (1,500 new posts a day)
• Total pet diaries: 28,000+

Dogster even has a search engine for dog friendly hotels.

The story of Dogster is great, too. Ted was out of work and taking odd jobs here and there, and decided to just follow a dream and create the site. Within 3 months the site was cash flow positive and by month 18 Dogster was profitable. The company never raised outside funds other than from friends and family

Dogster generates revenue from premium accounts ($20 per year), advertising, and sponsorships both on the side and for things like “The World’s Coolest Dog and Cat Show“, which was sponsored by Target, Nintendo and others. The show, by the way, had 20,000 entrants and over 1,000,000 total votes.

Catster (launched in June 2004) is Dogster’s sister site, but I hate cats and refuse to write about it.