Based on my observation,
most of the web startups are using either PHP or RoR or some other platform, but not Java. I haven't come across a single startup which is using Java for web app development.
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?
I'm a long term Python developer (since the 1.5.2 days). I've used a lot of different languages so far (from C to Haskell), and I've always avoided Java in the past (at the beginning because it was slow, later because everyone was telling me how bloated it is).
But using Java EE (!) instead of Python for a project a few months ago was really an enlightenment. Yes, it is somewhat bloated (although much less in the recent versions where you can use annotations instead of all those XML files). But on the other hand: It just works - exactly as documented.
With all other frameworks (based on Python, Ruby, etc.) that I've used so far I had to hack around in the framework or in the libraries to make it work the way I want. This starts with simple issues such as Unicode support, where the authors of a library obviously just didn't care if it works, and continues with distributed transactions, where you have to hack up the whole logic inside your application because the framework doesn't support them. Compared to this, with Java (EE) this just works rock stable and has most of the features you'll ever need.
From a performance perspective Java isn't that bad as either. For a project I've compared the performance of two simple (comparable) Web apps that I've wrote: One with Python on Django, the other one with Java on Glassfish). Once you increase the concurrency, the requests to the Django app just return error codes or take a long time to complete. In comparison, the Glassfish app just chucks happily along.
This does not mean that Java is appropriate for all use cases. But just don't believe the majority and try out yourself, if it works for you.