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1) Is it because of the lack of hosting support for Java based web applications?
2) Or, are there any serious performance issues when Java is used to develop web2.0 apps?
3) Any startups that already successfully using Java?
1 - we self host
2 - the relevant performance issue when using java to develop web apps is it's slower to build. I'd be pretty surprised if there were many cases where java / tomcat is slower to execute than rails or django. Now obviously all three are smoked by cached pages, but since a lot of our data needs to be updated daily, that isn't the easiest design for us.
As (almost) always, performance issues are with the db. And, as always, you should think about the data structure that you're using.
I've be very scared of a web startup that chose Java over Python or Ruby. Why subject yourself to Java? RoR and Django are both solid platforms (among others).
These days there is basically no reason to do webdevelopment in Java - even if you have legacy stuff lying around, JRuby or Scala will serve you much better and neither is that hard to learn and both will get you over Javas sever limitations (really, no anonymous functions? No Closures?)
A web application is often more than the choice web framework. When you choose Java as your fundamental technology you could build your business logic e.g. in Java/Scala and your web tier in Ruby on Rails which you can run on JRuby.
At least, that's probably the choice I'd make... :)