Kate Hudson Fabletics

The boomlet of niche-y e-commerce companies that once struck fear in the heart of traditional retail is going bust, deflating into a category that is also subject to the laws of economics.

Already the go-go start-ups that got big-time funding from Silicon Valley types, but could never really make their businesses work, have started to run into the wall. Nasty Gal was just the beginning, having spent heavily and taken money from former Apple Retail and J.C. Penney Co. Inc. chief Ron Johnson only to find its intellectual property sold off to Boohoo for $20 million in a bankruptcy auction last month.

Now others are expected to see the same fate. The stronger concepts, meanwhile, maybe finding themselves better off but are stuck making a tricky shift, looking for additional funding in a world that suddenly wants not just growth, but also profits.

The brands said to be navigating this landscape and in the market for capital include Bonobos, which is working with Citi, and Birchbox.

And some companies could do more than just bring in a new investor.

Fabletics owner TechStyle Fashion Group is said to be working with J.P. Morgan as it looks to raise additional money or even find a buyer. The company already toyed with the idea of an IPO last year as it tried to solve the typical tech company problem of how to satiate its investors.

“It’s always a possibility at a company our size and with the money that we have invested into it,” said Kimberly Tobman, vice president of global communications, of a potential IPO in May. “Of course, the investors want some kind of strategic exit. That’s what the end goal is when you’re putting that kind of money into a business.”

Others are finding themselves swept up into more traditional retail businesses.

So far, Wal-Mart’s been the most active, having bought up Jet.com for $3 billion last year, adding Shoebuy.com in January and outdoor apparel site Moosejaw for $51 million last month.

Wal-Mart Stores Inc. might well be hungry for more and experts see potential for the company to continue buying e-commerce companies as it squares off for a battle royale with Amazon, the undisputed U.S. e-commerce king.

Observers said more companies, from LVMH Moët Hennessy Louis Vuitton to Kering to Fast Retailing, could ultimately jump into the game and look to grow online via acquisition as the shakeout continues.

“It’s a natural economic cycle,” said apparel veteran Ari Bloom, chief executive officer of tech firm Avametric, which builds virtual fitting room software that’s being put to use by Gap Inc.

Bloom said business school graduates from the 2009 and 2010 period found themselves starting their own companies as jobs were hard to find, ultimately building e-commerce businesses that found a favorable funding environment in the years that followed.

“It was a time when people were a little bit more forgiving because they were looking for places to put their capital,” he said. “If [start-ups] were seeing growth, even if they weren’t seeing profit, it was encouraging enough for them to keep receiving funding.”

But times have changed as more players struggle just to keep their heads above water.

“We’re going to see a lot of M&A in the next year or two and I think we’re going to see a lot of companies go out of business or fold and sell their [intellectual property] like a Nasty Gal or a One Kings Lane,” Bloom predicted. “It’s destined to happen and it doesn’t mean that good businesses aren’t going to fail, that’s a tough thing to happen and that’s a good lesson.”

An executive at a prominent private equity firm that plays in the fashion space said investors are scrutinizing valuations much more closely than they were and that the key question today is: “What’s your path to profitability?”

“So many of these businesses start raising capital and it’s in this very West Coast model,” said the executive, noting that fresh funds went toward customer acquisition to drive growth with no profits in sight.

While some e-commerce companies that have taken venture money and built up complementary store businesses are said to be driving profits, most seem to find themselves in some version of this bind of having to pay back investors who bought in at a lofty valuation.

Negative Underwear went a different route and has never taken outside funding, which cofounder Lauren Schwab said has helped the business learn how to be careful with its money.

“Certainly lots of our peers are continuing to take money and generally the idea is that this is to fuel additional growth and I think it has to do with, customer acquisition is expensive and getting a brand out into the ether is expensive,” Schwab said. “Up until this point, we have not invested at all in paid advertising and in order for us to do that in a meaningful way, we would likely have to take on some funding. We have managed our customer very smartly and have been able to thoughtfully experiment and really focus on ROI, so we weren’t able to frivolously invest large amounts of money in potential big mistakes.”

Negative is profitable and reinvests those profits in its business.

It’s a form of corporate modesty the high-flyers of the digital age are increasingly looking to adopt.

More business analysis from WWD:

Footfall: How Retailers Want to Get Store Traffic Back

Which Retailers Are Closing Stores in 2017

Richard Hayne: The Retail Bubble Has Burst

Warren Buffett Baffled by Retail

Fear Factor: Rating Retail Risk

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