If you can avoid colo I would. It's such a pain in the ass to remotely troubleshoot the servers when that one thing does go wrong with the hardware. I blogged about it here:

http://teabuzzed.com/2009/08/the-number-one-reason-my-startu...

For the power I needed and what I could afford colo was the only way to go but it definitely came with a price...

If/when you're big enough colo probably makes more sense but in the beginning VPS is definitely the way to go.