Across India and beyond, the transition to a circular economy is gaining momentum. Startups are piloting innovative solutions in waste management, plastics, e-waste, and batteries, while investors and policymakers are beginning to recognize the sector’s potential. Yet scaling these innovations is not straightforward. Fragmented value chains, inconsistent regulation, financing gaps, and institutional bottlenecks continue to hold the sector back. Drawing on insights from Villgro’s SAAF Cities report and ANDE’s Investment Guides, this blog unpacks the common challenges and opportunities that can shape a stronger, more inclusive pathway for circularity.

GAPS AND CHALLENGES:

Fragmented Value Chains and the Role of Informality

Across sectors such as municipal solid waste, plastics, e-waste, and batteries, one challenge consistently stands out: the heavy reliance on informal labor. While the informal sector plays a critical role in keeping these systems running, it also creates gaps. Supply chains become inconsistent, recovery processes are often inefficient, and workers face serious health and safety risks without adequate protections.

This fragmentation not only limits the sector’s overall efficiency but also underscores the urgent need for more inclusive and structured approaches that can integrate informal workers into safer, more reliable systems.

Regulatory Implementation Gaps

While regulations such as EPR (Extended Producer Responsibility) and CPCB (Central Pollution Control Board) guidelines are evolving, their enforcement remains inconsistent across geographies. Urban Local Bodies (ULBs) often struggle with institutional capacity, making it difficult to apply these frameworks effectively. On the other side, startups face challenges in navigating localized compliance burdens, which slows down innovation and adoption.

Capital Access Barriers

There is limited availability of patient and blended capital to support waste and circularity solutions. The absence of credit history, collateral, and the long gestation periods typical of these ventures makes early-stage financing particularly difficult for enterprises in this space.

The SAAF Cities report highlights a missed opportunity in integrating startup-led innovations into ULB operations. At the same time, the guides point to the lack of readiness among small and growing businesses (SGBs) to meet government procurement standards, creating a gap between innovation and institutional adoption.

Poor Unit Economics and Demand Aggregation

Low value realization from recyclable outputs combined with fragmented demand continues to hinder the financial viability of circular enterprises. Adding to this challenge are high customer acquisition costs, particularly evident in the plastics and municipal solid waste (MSW) sectors.

SCALING

Platform-Based Aggregation

Both reports highlight the potential of digital and programmatic platforms to streamline matchmaking between solution providers and demand owners, including urban bodies, aggregators, and corporates.

Standardized Templates and Contracts

Scaling also depends on standardized procurement processes, contracts, and financial mechanisms such as first-loss default guarantees (FLDGs). Villgro’s SAAF report points to the role of pre-vetted innovation cohorts that can plug into city-level frameworks, while ANDE’s Investment Guides emphasize the importance of common templates that make procurement less burdensome for both enterprises and institutions.

Formalizing the Informal Sector

Another shared priority is the formalization of the informal sector, ensuring workers have access to skilling, financing, and safety measures. This not only improves livelihoods but also strengthens the reliability of waste and recycling value chains.

Replicable, Regional Models

Both studies underline the value of replicable, cluster-based approaches, for example, plastic recycling in packaging hubs or e-waste recovery in electronics clusters. These models become more sustainable when supported by anchor clients who provide consistent demand and revenue streams.

DEFINING SUCCESS

Anchor Partnerships with Public and Corporate Institutions

Both studies frame success as the ability to build investable business models that secure repeat contracts with urban bodies or large corporates. These partnerships, whether through direct procurement or EPR agreements,  provide enterprises with the long-term stability needed to grow.

Mobilizing Blended Finance

Another shared marker of success is the mobilization of blended finance to de-risk private debt. Tools such as guarantees or structured instruments make it easier for investors to participate in high-potential but early-stage ventures. Villgro’s pilots using FLDG mechanisms and Climake’s investment readiness programs both reflect this vision of unlocking private capital for circularity.

Jobs and Inclusion

Success cannot be measured by finance and contracts alone. Creating dignified, safe, and inclusive jobs, particularly by integrating informal workers into formal systems, is central to scaling circularity. Building pathways for skilling, financing, and workplace protections ensures that the transition to a circular economy is not only effective but also equitable.

THE WAY FORWARD

Systemic solutions for circularity scaling demand financial backing of pilots that go beyond isolated strong implementations. Key priorities include:

• The creation of digital platforms enables the aggregation of startup and urban body and corporate and aggregator supply and demand.

• The procurement process becomes more efficient through standardized contracts and templates and financial mechanisms that include first-loss default guarantees (FLDGs) to minimize obstacles for both enterprises and institutions.

• The formalization of informal workers’ roles combined with skilling programs and financial support and workplace protection measures will enhance both their livelihoods and value chain reliability.

• Plastic and e-waste regional cluster models need large corporate or public buyers to establish consistent demand and revenue streams.

• The combination of flexible financial instruments such as guarantees and revenue-based financing and catalytic capital structures should be used to reduce risks for early-stage ventures while attracting mainstream investors.

• Standardized performance and impact metrics should be developed to enhance data transparency which allows investors to make risk assessments with greater confidence.

Pilots demonstrate possible solutions but circularity needs ecosystem-wide regulatory and capital and labor and procurement transformations to achieve scalability. Investors and funders need to take action by using flexible financial instruments and blended capital structures to enable business expansion. The availability of catalytic capital enables circular enterprises to achieve sustainable growth while establishing dignified employment opportunities and resilient value chains.