(FORTUNE Magazine) – Here's a Silicon Valley recipe gone horribly awry. Take two newly minted Stanford Business School grads. Throw in a CEO who has run enough companies to think of himself as "adult supervision." Add annoying buzzwords like "infomediary" and an Amway-style marketing plan, and you get AllAdvantage, of Hayward, Calif.

Amid a heap of horrible dot-com business plans, this company has one of the worst: It pays people to surf the Web. When members sign up on the AllAdvantage site, they download an advertising bar that stays on their screens as they surf. For every hour they browse with the bar on their screen, they get 53 cents. If they refer another member to AllAdvantage, they get a 10-cent bonus for each hour the new member surfs. Members with a big "downline"--i.e., lots of referrals--have made several thousand dollars a month.

AllAdvantage expected 30,000 members after four months but got millions. At the end of the first quarter of 2000, its two million active members cost an average of $6.49 a month in payments and referral fees. It paid $40 million to members in that quarter alone.

The results have been devastating. AllAdvantage has burned through most of its $135 million investment, and it lost $66 million just in the first quarter. The situation can only worsen. Unlike other dot-coms, which can cut down on marketing costs and cancel big ad campaigns, AllAdvantage's model gets more precarious every day as word of mouth brings more and more people who sign up and demand to be paid.

This idea of an "infomediary"--a company that collects and aggregates information from a lot of users--has long been popular among Net gurus. AllAdvantage was supposed to finance the whole deal by selling advertisers information about its members' surfing habits. But that hasn't happened. It took in a meager $9 million in the first quarter of 2000. The prospect of "highly targeted" banner ads is still hypothetical; the information is all there, stored in AllAdvantage's data banks, but only a tiny fraction of it is currently useful to advertisers.

The company seems aware of its tenuous state. In late winter it started selling ads that appear on users' screens even when they're not actively surfing the Web. Then, last month, it began stretching member payments over a longer time period. But those are stop-gap solutions. Members still have to be paid, regardless of whether they get money every 30 or 45 days. And Web advertisers aren't lining up to reach people as they work on Excel spreadsheets.

AllAdvantage wouldn't discuss its plans, citing SEC rules that prevent companies in IPO registration from talking to the press. But David Pidwell, a venture capitalist who was AllAdvantage's first outside investor--he knew the founders from classes he had taught at Stanford on entrepreneurship, and he sits on the board--insists that the financiers know what they're doing. Pidwell says that in February, investors (including Softbank Capital Partners, which put in $70 million) valued the company at $700 million. "Are they stupid," he asks, "or are you stupid?" Good question--though hardly the most persuasive defense of the company.

AllAdvantage's hope was that $135 million would be enough to get it to the public market. That doesn't look likely. The company filed a public offering in February but put it on hold after the April Internet-stock crash. Now AllAdvantage is running out of time. Those close to the company say it has $50 million to $65 million, enough money to survive at least until the end of the year. That should give current investors--the likeliest source of additional cash--enough time to decide how much money they want to keep pouring down this sinkhole.

And that's the delicious irony of AllAdvantage's woes. This time the VCs are getting burned, while the site's members are profiting handsomely. Finally someone's getting revenge for investors who've been burned by dying dot-coms.