Trending: How to improve the SNES Classic’s lineup of games with an easy software hack had a smart team, top angel investors and big aspirations to become a dominant player in the emerging social network arena. But the 7-year-old upstart — founded at about the same time as Facebook — missed the mark. After a few years on life support, Seattle angel investor Mike Koss just decided to pull the plug on the service. Why didn’t, formerly known as Blue Dot, become the next Twitter or Facebook? I asked Koss that question today, and a few others about some of the lessons he learned about investing in ad-supported businesses.

Koss invested in the company in 2006 and later took on the co-CEO role working alongside Mohit Srivastava, a software engineer who has since returned to Microsoft. Koss has been running Faves with a part-time contractor over the past few years, just keeping the lights on. But he just decided to call it quits in part because the site was just “not earning enough money.”

Why did you close down Faves after all of the years? “The original expectation was to be something like a Twitter or a Facebook, but we reset those expectations way down a couple years ago. We had a series B (financing) with a couple of prominent local angels joining me in that. But we could never really hit on a new idea that we thought was game changing enough. And ad-supported sites need to have either really targeted direct selling opportunities or very high volume of users, and we didn’t have either of those.”

Why do you think you missed the Twitter or Facebook opportunity? “That’s a good question. I think there’s a lot of luck involved in that. It is hard to say. If you look back in our history, I think back in 2006, we were the darlings of (TechCrunch founder) Mike Arrington and we were in his top 10 products that he could not live without … and we had a pretty nice growth curve…. Things were looking pretty exciting back then, but then we just plateaued out and at our peak we had one million unique visitors per month. We plateaued at that level, and ad rates seemed to get worse and worse and our traffic basically started to dwindle away.”

What have you learned from the Faves experience? “I think it has made me a little bit more, I guess you can say either pessimistic or conservative. We kind of built it with the philosophy which was pretty predominant in that period of 2005 to 2006, which was build an audience and worry about how to make money later. We were a bit naive about what the prospects were for the advertising revenue rates. We were basically a factor of 10 off what we really needed to make just to have a sustainable, cash-flow positive business.”

What were you making on Faves with advertising? “Today, we are typically making about 50 cents per 1,000 page views right now. So, if you do the math on that, one million page views per month is going to pay you $500, so that is not a business. That’s a hobby for a part-time developer. A lot of entrepreneurs don’t really understand that. They think, ‘Oh, five million users, that’s a lot of people.’ But it’s not for a general Internet audience.”

So you don’t invest in online ad startups? “Yeah, I don’t like that anymore. (Laughs) I don’t see it being a viable business plan. Any company that comes to me with a pure ad-supported model, I tell them that they have to go back to the drawing board because I am not going to invest in something that will only pay off if you get, you know, 10 million uniques a month. And probably won’t even pay off well until you get to 100 million.”

I tracked Blue Dot fairly closely from its origins to its demise. Here’s one of my early reports on Blue Dot in which Kabir Shahani — who went on to create Seattle startup Appature — explained how the startup was different than other social sites.

“A lot of social sites on the Web were asking the question: Who are my friends? We didn’t need to know who our friends were. We were really interested in, what can I learn from my friends, what can I learn about my friends?”

A bit eerie, isn’t it, considering what Facebook has become?

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