Leaping Forward: Navigating Challenges for Circular Economy Start-ups

India is grappling with rapid urbanisation and population growth, resulting in a massive increase in consumption, and subsequently, generation of waste. The economic boom in India has resulted in a six-fold rise in annual material consumption between 1970 and 2015, from 1.18 billion to 7 billion tonnes, and is expected to rise further to about 14.2 billion tonnes by 2030. Annual waste generation in India is also expected to increase from 55 million tonnes currently to 165 million tonnes by 2030. Efficiently managing this waste requires adoption of circular economy models which emphasise on sustainability, waste minimisation, and resource efficiency.

Circular economy start-ups in India are pioneering innovative solutions to transform waste into valuable resources, produce alternative materials to replace existing synthetic ones, extend product lifecycles, and foster sustainable consumption patterns. Despite their critical role, these start-ups face a multitude of challenges that impede their progress and scalability. Understanding these challenges is essential for stakeholders aiming to foster a sustainable economic transition in India.

1. Financial Constraints

Securing adequate funding is one of the most significant hurdles for circular economy start-ups in India. The nascent stage of the circular economy sector means that traditional investors are often wary of the perceived high risks and uncertain returns associated with these ventures. Many circular economy start-ups require substantial upfront investment in research and development (R&D), technology, and infrastructure. Furthermore, the return on investment (ROI) is often long-term, making these start-ups less attractive to investors. For example, developing new biopolymers or sophisticated recycling technologies involves multiple years of R&D, followed by set up and running of a pilot/demonstration plant, before the technology can be commercialised. As per a report released by Kalaari Capital in 2022, circular economy start-ups attracted investments totalling only $1.8 billion over five years (between 2016-2021), while mitigation-oriented innovations in the energy and transportation sectors made up nearly 80 percent of the annual venture capital deal value in India. 

2. Lack of Infrastructure for R&D

Scaling innovations from the laboratory to commercial viability can be a lengthy and resource-intensive process requiring robust infrastructure for product development, prototyping, testing/trials and certifications. For product development and prototyping, start-ups need access to facilities which have a range of equipment - these facilities are available only at select R&D institutions and are generally expensive. In particular, biotechnology start-ups in the circular economy sector require access to fermenters of multiple sizes – these are hard to come by, especially in the various sizes that are needed during different stages of the product development. As for testing/trials and certifications, given that the facilities to conduct these are few in number, market entry is often delayed for start-ups as they scramble to gather all the required data. For instance, obtaining third party testing data for functional properties may take up to six months, while a biodegradability certification may take six months to one year, taking into consideration the required testing conditions. 

3. Measurement and Impact Assessment

Measuring the impact of circular economy initiatives is complex but essential for demonstrating value and securing support. Start-ups need reliable metrics and methodologies to assess their environmental, social, and economic impacts. However, the lack of standardised measurement frameworks makes it challenging to quantify and communicate the benefits of circular practices effectively. Developing robust impact assessment tools and engaging in transparent reporting are critical for building credibility and attracting investment. This is particularly important in India, where demonstrating tangible benefits is essential for gaining the trust and support of both consumers and investors.

4. Regulatory and Policy Challenges

Lack of incentives to encourage biodegradable alternatives and recycled products, lack of clarity and standardisation in waste collection, segregation and recycling protocols, and complex Extended Producer Responsibility (EPR) frameworks have inhibited the growth of circular economy start-ups. For example, while biodegradable plastics are to be exempt from EPR, there is no clarity on how ‘biodegradability’ of plastics will be validated. Since biodegradable plastics often have an appearance very close to conventional plastics, they are difficult to distinguish by consumers and authorities, other than by scientific analysis. Furthermore, complex and fragmented regulations across different states create inconsistencies and operational difficulties for start-ups trying to scale their operations nationwide.

5. Supply Chain Complexity

Establishing and managing efficient supply chains is crucial yet challenging for circular economy start-ups in India. Creating a closed-loop system involves coordination among various stakeholders, including suppliers, manufacturers, distributors, and recyclers. Ensuring the quality and consistency of alternate/sustainable or recycled/upcycled materials is challenging due to variations in supply of waste, collection methods which often involve the informal sector, and lack of processing capabilities. Moreover, logistical issues related to the transportation, storage, and sorting of materials further complicate supply chain management. Certifications and testing can play an important role in building more trust in the supply chain and reducing complexities. 

6. Market Acceptance and Customer Behaviour

Customers are often accustomed to low-cost, disposable products, and there is a prevalent perception that sustainable products are either inferior in quality or significantly more expensive.  Educating customers about the environmental and economic benefits of circular products and services requires substantial effort and resources. Building trust and demonstrating the value proposition of circular economy solutions is essential to drive demand and foster market acceptance. Government's role in creating enabling policies can also nudge customers to transition towards a circular economy. Other additional barriers that start-ups must overcome include intellectual property protection, technological feasibility, and competition from established linear economy players.  In this context, pilots can offer a win-win proposition for both start-ups and their customers. For start-ups, pilots provide a low-risk, cost-effective means of testing and refining their offerings, gaining valuable market insights, and building credibility. For customers, pilots offer early access to innovative solutions, the ability to influence product development, and the opportunity to test new technologies at minimal cost and risk.

Circular economy start-ups in India are at the forefront of driving sustainable transformation by reimagining how we produce, consume, and dispose of materials. However, they face significant challenges that require coordinated efforts from various stakeholders to overcome.  

The Techtonic: Innovations for a Circular Economy, an initiative by Social Alpha in partnership with H&M Foundation and Saamuhika Shakti provides innovative circular economy start-ups financial support and access to pilots, while providing agency to waste picker families to lead secure and dignified lives. This collaborative effort aims to drive innovation, improve outcomes and achieve mutual success for paving the way for a more sustainable and resilient economic future in India.

To know more about this initiative, click here.

- Written by Uthara Iyer , Climate and Sustainability, Social Alpha