I started out with a VPS. VPSes are great! Much more economical and great for starting out hosting. But for biger resources dedicated servers seem to be the way to go. REliable and feature rich providers like SoftLayer bring you all the benefits of colo to a dedicated environment. I'm coloing now since we want to own my hardware and have full control but dedicated is most popular and most of our colo'ed customers are moving to dedicated solutions.

It's just cheaper and easier, especially on the books, to have a dedicated server lease. It's also easier to upgrade, cancel, or move servers around when you have a monthly dedicated server lease. Plus, the more dedi boxes you have with a provider, the cheaper they get. This is generally not true with owned servers as companies like Dell only discount for mass purchases.