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E-commerce companies are having a Millennial moment.

This story first appeared in the August 6, 2014 issue of WWD. Subscribe Today.

They’ve moved out of their dorm rooms and set up shop, in many cases establishing substantial businesses with real sales traction — but they still can’t support themselves. With the exception of a few firms, such as Asos and Zulily, experts say fashion e-commerce companies are largely losing money and relying on funds from investors to rapidly accumulate customers and build their brands.

Nor are fashion e-tailers the only ones. continues to rack up megalosses as it aims for global domination, becoming the poster child for the business model for e-commerce and proving irrefutably that the road to black in the online world is a long one.

“Anyone who has taken money is absolutely not making money,” said Sucharita Mulpuru, vice president and principal analyst at Forrester Research, noting many e-commerce brands are spending capital on customer acquisition and brand building.

Bonobos, Warby Parker and BaubleBar are among those that Mulpuru said were engaged in the costly and time-consumer exercise of “buying growth.

“There are not a lot of examples of successful brands that have been blockbusters using that strategy,” Mulpuru said. “That’s where I’m baffled by investors continuing to pour money into this — [they] have naïve perspectives that they can be the ones to pour $50 million [into a company] and create a brand that’s going to kill its market.”

Scott Friend, a managing director at Bain Capital Ventures and an original investor in Rent the Runway, said it’s a fallacy that digital brands are cheaper to build than their brick-and-mortar equivalents.

“It turns out the nice thing about stores is that customers walk by, and the hard thing about the Web is that customers don’t just walk by,” Friend said. “You have to get them and getting them costs money.”

He said brands born online end up with a trajectory and economic model similar to those that were born as brick-and-mortar operations decades ago.

“To some extent, there was this unfair focus on these new brands and why their economics weren’t better faster — and the reality is it takes time,” Friend said. “The last-generation guys built one store and got it profitable, and then another and another, and as a result were profitable sooner, but smaller.”

On the other hand, online-first companies are building one, massive store on the Web with a national customer base behind it.

Creating a huge store out of the gate and building enough consumer momentum to fuel it profitably might be a very capital intensive path — but a decade from now, Friend projected that younger dot-com companies such as Warby Parker or Rent the Runway will be held in similar esteem to a J. Crew or Kate Spade.

Whether e-commerce players look to make a big splash with an all-out push for dominance or opt for slower, profitable growth, they’re venturing into a highly competitive landscape with some very established players and a range of business models that are still being tested.

There is a third way, though. Some of the Web’s most successful e-commerce companies have taken on the role of middleman, providing the platform for brands to court customers while driving huge profits from advertising. For instance, gross merchandise sales — including, increasingly, fashion brands — enabled by the main Chinese Web sites in Jack Ma’s Alibaba Group tallied $270 billion last year. Although the company’s own revenues amounted to a much smaller $8.44 billion, it managed to keep $3.71 billion of that as profit.

Ma said the company, which is planning for a blockbuster initial public offering on Wall Street this year, sees plenty of runway for its model and has his eye at the very top, on Wal-Mart Stores Inc., which is expected to post sales just shy of $500 billion this year.

“In the past, people did not expect Wal-Mart’s sales revenue could reach $500 billion,” Ma said recently. “It is scary. [Wal-Mart’s] $500 billion would require several million staff. It’s huge. Alibaba probably only needs 30,000 employees to create sales revenue as big as Wal-Mart’s. In order to have 10,000 more customers, they need to buy a big piece of land and buy a lot of equipment and stuff. We only need three more servers.”

Which gets to the heart of the matter.

Profits are what’s left from sales after the company covers its costs and pays taxes and so forth. Different business models have different cost structures. Online players have set up the technological infrastructure to run their sites, acquire customers and handle shipments to shoppers, while brick-and-mortar companies have inventory, lease expense and so on.

“On the e-commerce side, the fixed costs are reasonably high,” said Todd Huseby, partner in A.T. Kearney’s Digital Business Forum. “They’re generally funded by the venture capitalist” or other backers.

Huseby said shipping costs for e-commerce companies are significant.

“It’s about $2 for shipping a package through USPS and you can’t get away from that….It’s higher if you’re doing FedEx and some players, Amazon specifically, they’re hoping to build a distribution network on their own,” he said.

As a result, scale becomes very important. Early on, companies want to get bigger to cover to the cost of their initial investment. Once they’ve established themselves, they want to bulk up more to build capabilities and drive their costs lower. In a sense, it is the Wal-Mart model but online, rather than in physical stores.

“Amazon’s done such a good job on the operations of e-commerce that they’ve basically created what economists would call a winner-take-all market,” Huseby said. “It’s really, really hard for a new entrant to go into a category that Amazon is in without some completely different customer value proposition.”

The path Amazon has blazed — and continues to blaze — is part of the reason why so many companies emphasize exposure over profits early on. These Internet entrepreneurs figure that if Wall Street and investors give Amazon a pass on profits, why not their company?

Amazon’s founder and chief executive officer Jeff Bezos, who turned an early online bookstore into a commercial giant that sells almost everything and also plays in telecom and TV, is still investing heavily and at the expense of profits.

The company logged losses of $18 million for the first half, even as sales jumped 23 percent to $39 billion. Investors have largely accepted the lopsidedness of the company’s finances, seeing the growth and anticipating big returns down the line. But their patience has shown signs of waning. The company’s stock has fallen 12.9 percent to $312.32 since it detailed its second-quarter results July 24.

Aileen Lee, a 15-year veteran of venture capital firm Kleiner Perkins Caufield & Byers, said Amazon has been both building capabilities and doing right by its shareholders, even without posting profits.

“Amazon is worth $145 billion — and over the past 20 years there have been many times when pundits said Amazon should be more profitable, but they are in it for the long game,” Lee said. “They say they are going to reinvest in their structure at the expense at being profitable. They’ve become more capable…and in retrospect it’s been the smart choice for them. If they listened to pundits, I don’t think a lot of the cool things we have from Amazon today would exist.”

And while there have been grumblings from investors over profits, the stock has still been gaining ground, rising 32.9 percent over the past two years, versus the Dow Jones Industrial Average’s 25.5 percent gain.

NEXT: Asos, Nasty Gal and More >>

Other early players have taken a different path. Asos, for instance, has been an anti-Amazon of sorts.

Whereas Amazon opened about 50 facilities between 2010 and 2013 alone, the U.K. based Asos has just four warehouses — in Ohio, the U.K., Germany and China. It’s this tight control of spending and distribution that’s helped propel the company to profitability relatively quickly, following the brick-and-mortar profitability playbook focused on organic growth.

“When we started, bear in mind that the recession had hit and the possibility of raising money back then disappeared — so we had no alternative than to be profitable early,” said Asos ceo Nick Robertson. The company raised about $4 million around the time of its launch in 2000.

“We started small and grew, and grew profitably,” Robertson said. “That is still our plan.”

In the fiscal year ended Aug. 31, Asos’ profits jumped 39 percent to 40.9 million pounds, or $64 million at average exchange, as sales also rose 39 percent, to 769.4 million pounds, or $1.2 billion.

Asos’ profits for the first half slipped 21 percent, but still weighed in at 15.3 million pounds, or $24.8 million.

Robertson noted that this year might be the first time profits decline — despite an increase in sales — due to the site’s launch in China and significantly expanded logistics capabilities. But the company has bided its time, raked in money and waited to make such an investment.

While many other fashion e-tailers are experimenting with brick-and-mortar stores, Robertson is adamant that Asos will remain within the confines of the online world.

“The demographic we target is online,” he said. “It’s our firm belief that the percentage of fashion they are buying online is increasing, so it would be counterintuitive for us to go physical when they are just spending more online.”

Also taking a more organic approach online are Nasty Gal and ModCloth, which are fueled by a social mind-set and a digitally savvy consumer who is discovering products on Instagram, Pinterest and blogs.

“A company like Nasty Gal was profitable before it raised venture capital,” said Rebecca Kaden, principal at consumer-only venture capital firm Maveron. “It was running a cash-flow business — it grew organically. [It] didn’t spend money on acquiring customers, but spent money on inventory that customers would buy.”

However, there is a flip side to organic growth — unless organizations have skilled management in place for when a slowdown occurs, they end up with a situation similar to what’s happening at ModCloth. The e-commerce site, which was founded in 2002 and didn’t raise its seed round until it was around for six years, laid off 70 employees in June.

Nasty Gal, which has also relied heavily on organic momentum, has spent time bringing in talent and building infrastructure for its next stage, which includes the opening of its first retail store later this year.

Then there are Bonobos and Warby Parker, which from the get-go bet that money raised in the early stages will make their respective brands easier to scale, drive up margins and hopefully drive down the cost of customer acquisition. Both are now taking an omnichannel approach, melding online with brick and mortar.

Kaden contends that while neither of these is profitable yet, huge sums of money are going toward brand building and acquiring a customer who will hopefully have a high lifetime value. To date, Bonobos and Warby Parker have raised almost $128 million and $115.5 million, respectively.

Venture capitalist Lee, who two years ago started Cowboy Ventures to invest in companies at the seed stage, is a fan of the vertical retail model — be it Nasty Gal’s version or Warby Parker’s.

“Investors see the size of market opportunity and how valuable these companies will become over time,” Lee said.

She cited Google, Uber, Twitter, Facebook, Instagram, Pinterest and WhatsApp as companies that have delighted customers and built strong brand recognition before focusing on monetization.

“Many of them have achieved fantastic public-market or private-market acquisition values before being profitable,” Lee said in defense of online opting to scale first and turn a profit later. She noted that companies turning a profit on investments of $30 million to $50 million are likely not growing as quickly as the ones fueled by larger amounts of funding early on.

She pointed to Stella & Dot as one of very few companies that have been cash flow positive for some time without raising much money. The decade-old accessories company, which relies on a social-selling model of direct sales with a strong e-commerce component, raised just $3 million.

Stella & Dot founder and ceo Jessica Herrin said that the company only had to spend about $2 million before turning a profit, which was in 2007. It’s been profitable ever since — going from sales of $33 million in 2009 to $220 million last year. Instead of focusing on acquisition at all costs, Herrin decided to focus on acquisition at a reasonable cost. She makes sure the cost to acquire a customer doesn’t surpass their lifetime value.

“We’ve always called ourselves social commerce — high-tech and high-touch combined, and our acquisition is word-of-mouth. Our [marketing] spend is really commission for our stylists, [because that’s who] drives the sale and success,” Herrin said of the more than 30,000 stylists from six countries (there are 15,000 active stylists a month).

Similarly, Gregg Renfrew, founder and ceo of BeautyCounter, relies on a combination of e-commerce and a network of more than 2,000 consultants worldwide to serve as brand ambassadors, who sell the brand’s “safe” beauty products. The company launched in March 2013 and has raised funds from individuals and institutions such as Eric Schmidt’s TomorrowVentures, New England Development and Three Ocean Management.

She is gearing up toward closing a Series B in the fall, which she estimated will be around $10 million to $15 million and predicts that BeautyCounter will be cash positive by mid-2015.

“As we mature, we will start to spend more on customer acquisition and invest in e-commerce as opposed to investing in the brand,” Renfrew said. “It’s hard to invest purely in acquisition because you haven’t begun to see what a brand can do on its own. People should be prepared that, if you’re building e-commerce business, you have to be prepared to invest. Most e-commerce companies I know spend tens of millions of dollars before they turn cash positive.”

Three-year-old Everlane, which sells its own brand of luxury basics, has only raised two small rounds — the first was $1 million and the second was $4 million — from investors including Maveron, Khosla Ventures, Betaworks, Lerer Ventures, SV Angel and Toms Capital. Cofounder and ceo Michael Preysman expects the company to break even this year and to hit $30 million in sales.

“It’s never the ‘go-big-or-go-home’ [mentality],” Preysman said. “We force ourselves not to spend too much on marketing, [because] if you’re doing that, then we aren’t building the brand enough. We want that word-of-mouth.”

Year-and-a-half-old accessories e-commerce site Editorialist turned a profit early on, cofounder and co-ceo Kate Davidson Hudson said. Focused on “strategic, measured and organic growth,” as well as running a lean operation, Davidson and cofounder Stefania Allen raised $2 million in Series A funding in October.

Hudson acknowledged that there is a lot of “fast money” in the investment market right now, but her philosophy is rooted in the idea of long-term brand building.

“Reaching profitability is acutely important as the time to build brand loyalty and partnerships has a longer timeline than some investors might have who are chasing quick growth with the hopes of a successful IPO before the tide flows back out and reveals who is and who isn’t providing returns to shareholders,” she said.

Then there are those e-commerce entrepreneurs who don’t want any money at all, such as six-month-old start-up Negative Underwear, an innerwear company launched by two University of Pennsylvania graduates.

“It seems like there is a big trend in the world of start-ups — and that is success measured by how much money you’ve raised versus how profitable your business is,” said cofounder Marissa Vosper. “We have a hard time getting comfortable with that trend, which is why we’ve been adamant about staying self-funded, even though we have a lot of conversations about it.”

The company turned a profit within two weeks and has been keeping costs low, with almost no overhead. The majority of the cost went into product — luxurious innerwear that rivals the likes of high-end lingerie brands, but with prices not much higher than Victoria’s Secret. Bras start at $65 and go up to $85, and underwear tops out at $40.

“There’s the camp of raise money fast, scale fast and sell fast,” she said. “I don’t think that’s the approach we’re taking with our business.”

There clearly is no one, clear strategy — and investors seem willing, for now, to accept both. What’s clear is that the road to profitability is filled with both tortoises and hares. One group is plugging away, gradually gaining sales and profits, while the others race ahead with big investments on customer acquisition.

Who ends up dominating the still-developing digital world is anybody’s guess. After all, Amazon is not even an adult yet: it was founded in 1994.