I got a chance to chat today with Mike Koss, the angel investor and former Microsoft developer who heads the Seattle Internet incubator Startpad.org.

It was a good news, bad news conversation. Koss was excited to show off a neat litte application called G02.me that he built over the past few weeks using Google's App Engine. The service shortens URLs to 16 characters, rather than the 25 characters from competing service TinyURL, and provides some unique features like the ability to see the most popular links on the G02.me home page.

And the bad news? As suspected, Koss' other Internet company -- Faves.com -- is on the ropes. The social networking startup, formerly known as Blue Dot and backed with about $2 million in angel financing, laid off its remaining two employees about a month ago.

Now, it is just Koss and a contractor who are trying to keep the lights on. Koss -- who held the title of chief cheerleader -- isn't doing much cheering lately. And he said the current state of Faves is a hard pill to swallow.

"It is a little sad. I put a lot of my life into that company," he said. "I hate to see that it is not going to be all that it could be."

It is not unusual to see a startup company -- especially a social bookmarking service like Faves -- hit the wall. But the interesting part of the story, at least from my perspective, is that Faves.com was (and still is) attracting a decent audience. According to Koss, the company is driving about 1 million unique vistors and 2 million page views per month.

But Koss told me that the ad revenue just wasn't there to operate a self-sustaining company. Faves routinely ranked in the top 25 on the Seattle Startup Index, which could spell trouble for the 275 or so other companies below it on the list that also want to make money from online advertising.

At this point, Koss said the goal is to keep the Web site turned on for the next year. He's chatting with angel investors about recapitalizing the business. 

But based on the conversation, it sounds like Koss is moving on. In the meantime, Koss has G02.me which he said started as a "weekend project"  and an experiment in developing an open-source application.

Who knows. Sometimes those are the ideas that end up taking off.