Daniel Klaus, co-founder and CEO of Music Nation Inc., talks with Tech Confidential about how his Web 2.0 startup is capitalizing on social networking and online video to replace highly paid talent scouts with fans who work for free. Leveraging the popularity of reality-TV talent shows, especially "American Idol," that let the audience pick the winners, Music Nation invites visitors to the Web site, launched last year, to vote on their favorite garage bands, based on homemade videos provided by the rock-star wannabes. Winners take home recording contracts with Original Signal Recordings, a joint venture with Epic Records, as well as access to first-class producers and engineers.

"This is the next-generation A&R [Artists and Repertoire] vehicle," says Klaus. "Instead of spending $500,000 to develop an album, we spend tens of thousands to develop digital singles." The strategy is to develop 10 to 15 bands a year and nurture them over time while gradually building a fan base.

Investors and others like what they hear. Music Nation has attracted former DoubleClick Inc. CEO Kevin Ryan as its chairman, and the company has raised $5.5 million from Greylock Partners and Point Judith Capital. Music Nation isn't Klaus' first startup. Eschewing college, at 18 he launched a Canadian record label called Passion Music Group, which was sold to BMG Music in 1998 for an undisclosed sum.

Klaus is one of five Web 2.0 pioneers, all under 40, featured in Tech Confidential's special report on next-generation dealmakers. Collectively, they are changing the relationship between the Internet and the individual. Each a serial entrepreneur, their companies are magnets for venture capital and are good bets to end up as initial public offerings or trade sales. —Mary Kathleen Flynn

See Tech Confidential's special report on next-generation dealmakers