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Also, would it not be inefficient to virtualize a virtual machine on a virtual machine?

If you're planning on using virtual machines, then potentially yes.

As far as I know, AWS doesn't allow running a hypervisor inside another hypervisor.

Ravello [1] seems to do this with with VMWare and xen-blanket[2] claims to allow running Xen on AWS.

[1] http://www.ravellosystems.com/ [2] https://code.google.com/p/xen-blanket/

I am planning on hosting VPS's, so should I get my own server(s)?

Given the initial investment of capital, probably not right away. Unless you're really confident that your own servers will perform better AND that the performance difference actually matters to your target market.

If neither of those things is true, then you're probably better off waiting until you can afford to make the investment purely out of your profits.

Of course an alternative is to just get dedicated servers without having to worry quite as much about managing your own hardware.

Disclaimer: I probably don't really know what I'm talking about :)

To host user's sites?

Yes. Although I can't seem to find a reference right now. If you check the IP of a running Heroku instance however, you'll see it's an AWS IP.