When you think about paper dolls, you probably think about children from past generations painstakingly attaching little outfits onto a cut-out female figure. Paper dolls have come a long way since then.

Teen and tween girls these days spend hours dressing up dolls--only these are online, in the form of avatars, or virtual representations. Consider Mattel's (MAT) Barbie, who was also a favorite paper doll. She now has a virtual world called Barbie Girls where girls can create their own avatars and try on clothes at a virtual mall.

And Barbie isn't alone. A whole wave of avatar sites is hoping to capitalize on this age-old desire. Part of the fun of virtual worlds for teens is experimenting with identity.

Boys do this all the time in video games where they assume fantastic identities very different from whom they are in real life. For tween and teen girls, fashion has always been a big part of self-expression. How else to explain the popularity of Teen Vogue, which stands tall even in a ravaged teen-magazine market, where many publications are going online or folding altogether.

And while most girls can't afford the junior couture featured in Vogue, they can afford virtual couture online. And for this creative, tech-savvy generation of girls, it's not always enough to just click and wear virtual clothes or accessories. Many design their own.

They even have a role model. Lauren Conrad from MTV's (VIA) The Hills has her own virtual clothing line for sale in MTV's virtual Hills. Virtual fashion is nothing new in online worlds such as Linden Lab's Second Life, an adult-oriented venue filled with fashion designers and virtual clothing outlets from chains such as American Apparel.

But it's a relatively new phenomenon in the tween space. Helping fuel this trend is parental demand for safe spaces where their kids can hang out that are anything but MySpace, which has been plagued by instances of predatory behavior by adults. But the real driver is the combination of girls' passion for fashion, their desire to socialize, and a high level of comfort with using digital tools to express creativity.

Because of this, girls are spending lots of time online, dressing up and showing off avatars. Little wonder that young females--and venture-capital dollars--are gravitating to startups like Stardoll, which lets users create and dress celebrity paper dolls; GirlSense, a virtual doll community; and Gaia Online, a virtual world where avatars look like Japanese manga characters. It's also why traditional brands such as Mattel, Disney (DIS), and Trollz maker DIC Entertainment have entered the space.

Each site--Barbie Girls, Disney Fairies, and Trollz.com--offers the user the ability to create her own character, play games, chat with other avatars, and decorate her own "room," or page. Startups Stardoll and GirlSense are also kid-friendly and compliant with the Children's Online Privacy Protection Act [COPPA].

Gaia Online, Wee World, Meez, and IAC Interactive's (IACI) new Zwinktopia all cater to teens [and adults] 13 and up. And most important for the business-minded, the sites create a space for building a brand and advertising a product. Most offer some sort of virtual currency, whether it's Trollz "Trollars" or Gaia "Gold," to buy virtual goods, often distributed as a reward or incentive for participation.

Some of them also sell virtual items for real money. According to the blog Tech Crunch, Stardoll sells between 60,000 to 180,000 items a day. In addition to virtual goods, many of these sites want their users to buy real-world products.

Mattel hopes to sell Barbie-inspired handheld music players to interact with the Barbie Girls site. Gaia Online sells all manner of physical garb. For established brands like Barbie, Trollz, and Disney, it's all about getting girls to convince their parents to go from virtual fun and games to real-world purchases.

For the startup companies without strong brands or established products, the financial model is more about sponsorships and brand integration. WeeWorld, a site that lets you create cute avatars that can act out emotions using instant-messaging commands, has sold a sponsorship to Skittles where WeeMees sport Skittles bikinis, ride Skittles skateboards, or wear Skittles T-shirts against an animated Skittles background. New Line Cinema recently launched a promotion on Gaia Online for its film The Last Mimzy, inviting Gaians on a quest to view the movie trailer and then retrieve a "Mimzy plushie" to accompany their avatars.

While this arena is still very new, a few leaders have emerged, and their numbers are nothing to sneeze at. According to Tech Crunch, Stardoll gets 5.5 million unique visitors a month and is adding 20,000 members a day.

Gaia Online says it gets 2 million unique visitors a month, while GirlSense reports more than 1 million. The challenge, of course, is getting girls to come back and spend more time on these sites. That's why most of these sites offer community in the form of chat and forums, as well as online games.

Gaia Online views dressing up Gaians as "just the start," says CEO Craig Sherman. "You use [avatars] to participate in a community of millions with literally dozens of different activities on the site--from watching movies to inviting friends to your house to voting on user-submitted art to game playing to message boards and more." Just as our grandmothers spent hours creating the perfect dresses for their paper dolls, today's tween and teen girls are flocking to sites where they can personalize and accessorize their avatars.

Marian Merritt, director of consumer experience at Symantec (SYMC), was excited to find her daughter dressing her avatar. "I was quite surprised to see my 12-year-old daughter playing with these," Merritt says. "My mother loved paper dolls and for years tried to interest her, so to suddenly see my daughter using interactive paper dolls was kind of a nice thrill.

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