Unwrapping Innovation: Where $1.9B in Sustainable Packaging Investment Has Missed the Mark

In 2024, the global food and beverage industry spent $185B on product packaging. Packaging serves many different purposes for brands: it’s designed to draw attention on the shelf, tell stories that solidify brand identity, and share important information about ingredients and potential allergens. In recent years, brands have also increasingly used packaging to demonstrate sustainability commitments and environmental consciousness to customers, with 14 out of 15 of Fortune 500 food and beverage consumer packaged goods (CPG) companies, including PepsiCo, Coca-Cola, Mondelēz, and General Mills, publicly disclosing specific goals and timelines to reduce the amount of plastic waste generated by their product packaging.

To meet the needs of these customers, the packaging industry has responded with sustainable alternatives to plastic and other carbon-intensive materials. Innovators like TetraPak represent the fragmented industry perfectly: the family-owned company has been operating since the 1950s, but took off as a sustainable alternative to plastic packaging with its innovations in highly functional plant-based packaging in 2015. Alongside corporate R&D, over 400 startups have entered the race to develop sustainable packaging innovations in the last decade, per Pitchbook, including a range of alternative bioplastic materials, nanocoatings, and reusable solutions.

However, a significant gap has emerged between the innovations developed by startups and backed by venture capital firms, and the operational needs and requirements of leading food and beverage companies that represent their target market.

We conducted interviews with a dozen leading Fortune 500 food and beverage corporations, including both CPG companies and B2B ingredients suppliers who signatories of the Ellen MacArthur Foundation’s New Plastic Economy Global Commitment. We also spoke with retailers, packaging manufacturers, startups, and non-profit startup accelerators. Across our interviews, we found that the innovation taking shape in the startup landscape is structurally misaligned with corporate priorities for the future of packaging.

Our analysis shares key insights from corporates, maps the market for startup innovation, and identifies investment opportunities that better align with customer needs for present and future startups in the packaging sector. We see exciting opportunities for venture capital to invest in packaging innovations that address corporate interest in drop-in solutions that are cost-competitive and highly functional. These venture-scalable innovations span from AI-driven material design and development to intelligent packaging systems that monitor products and deliver real-time data to consumers.

Market Overview

Sustainable packaging encompasses a range of material innovations and circular technologies and systems that focus on minimizing the environmental impact throughout a product’s lifecycle, with an emphasis on alternative or sustainably sourced materials, resource efficiency, and waste reduction. Examples include the use of recycled paper, plastic, or aluminum, designing packaging for reusability or recyclability, as well as packaging traceability tools and the infrastructure to support these innovations.

The global sustainable packaging market is projected to nearly double its 2025 market value in the next 5 years, driven by growth in the food and beverage segment, which represented over 49% of the market in 2023. Meanwhile, 69% of consumers expect brands and retailers they purchase from to offer sustainable packaging by 2025.

Delivering on sustainable packaging commitments faces both policy headwinds and tailwinds. At the federal level, the current administration has been rolling back environmental regulations, with a focus on supporting domestic oil and gas production that will favor virgin plastic production. At the same time, several US states have passed or are actively considering Extended Producer Responsibility (EPR) laws for packaging. These laws require manufacturers and brand owners to fund and manage their own recycling programs, which could incentivize sustainable packaging design and require the use of recycled materials, opening the floor for innovation to meet sustainability standards while maintaining performance and price parity.

Key Insights from the Food & Beverage Industry

We found that the leading food and beverage companies interviewed shared several strong beliefs about the future of packaging:

1. Cost is the #1 priority. It is hard to justify paying a premium for packaging when profit margins are under strain from other supply chain considerations.

Across our interviews, implementing a sustainability-related cost premium on packaging was a non-starter. This was especially true for B2B business models, where incremental costs of sustainable packaging cannot be passed on to consumers. For this reason, corporates were almost unanimously skeptical of 1:1 material substitutions with high operating expenses that often face scalability challenges (e.g. from plastic to bioplastic alternatives). Instead, they sought innovations that minimize overall material use, simplify material streams, and enhance recyclability.

2. Functionality and performance are imperative. When it comes to packaging performance while ensuring food safety and customer satisfaction, there is no room for compromise.

Packaging must balance sustainability with functionality – an aspect the industry is not willing to compromise on, especially if it interferes with consumer experience. Innovations that address the complexity of multi-material packaging (e.g. through single-material, multi-layered packaging) while improving the shelf-life of the packaged goods are particularly promising, as long as they can easily fit into existing supply chains.

3. Innovation requires adequate and advanced infrastructure. Delivering on corporate sustainability goals will require system-level infrastructure supported by a supportive legislative and policy landscape.

Current collection systems, especially upstream, are insufficient to support circular models. A critical bottleneck is the mismatch between the high demand for post-consumer recycled (PCR) plastic and its limited supply, making it difficult for corporations to meet their recycled content targets. Delays in infrastructure and design changes have led some major members to exit the US Plastics Pact, even as the alliance shifts focus to 2030 targets.

In response, stakeholders are exploring several solutions. There's growing interest in enhancing the traceability and sharing of PCR plastics and packaging more broadly. Many stakeholders also support the development of advanced recycling technologies, which could not only reduce plastic waste but also supplement existing supply chains with non-virgin materials.

Sustainable Packaging VC Landscape: A Mismatch Between Investment Dollars and Corporate Needs

Between 2016 and May 2025, a total of $1.91B in venture capital funding went to US sustainable packaging companies, with the largest amount of capital raised in 2022, totaling $603.52M across 42 deals. The vast majority of companies that have received funding were developing novel materials to replace virgin plastic in single-use applications. However, based on our conversations with corporates, these innovations are not a top priority. Unsurprisingly, only 42% of the companies that received funding between 2016-2022 have gone on to raise another round of venture funding since. The macrodata confirms this trend, with less capital raised between 2023 and May 2025 combined than in 2022.

Source: Pitchbook (May 2025)

Investment Gaps & Alignment Opportunities

While challenges remain, the space is ripe for innovation and success will depend on aligning innovation with genuine concerns and priorities faced by the food industry. Corporates are eager to explore innovations that cut packaging and/or operational costs, enhance performance, and enable traceability within their supply chains. Startups developing sustainable packaging solutions must clearly identify the core function of their technology.

Our market map reveals a crowded market for alternative materials (also referred to as biomaterials or biopolymers). This stands in opposition to industry voices, who shared concern over low profit margins, issues with scalability and cost-competitiveness, and a questionable impact case. In contrast, a white space emerged around the design of recyclable and smart packaging, as well as the supply and traceability of virgin-grade PCR streams.

Informed by our conversations with corporates, we believe venture capital can unlock strong returns across three fast-evolving areas in sustainable packaging: material and design innovation, smart packaging technologies, and system-wide circular infrastructure.

(1) Material & Design Innovation

Material and design innovation is accelerating through AI-powered technologies like AI Materia and Orbital Materials, which accelerate the identification of high-performance and/or mono-materials while reducing R&D costs and optimizing packaging design for enhanced recyclability. In parallel, emerging startups like Macrocycle, New Hope Energy, and Flo.materials are developing advanced recycling technology that restores PCR packaging to virgin-like quality.

The use of AI-assisted material design platforms can help identify and scale novel materials and tailored applications with significantly better unit economics. These platforms also allow for flexibility in revenue model, with options for licensing, material sales, and joint ventures leading to a higher likelihood of venture scale. Meanwhile, achieving cost-competitive, virgin-grade recycled polyethylene terephthalate (PET) and other plastics commonly used in packaging will unlock access to the broader plastic packaging market. Corporate customers are especially interested in virgin grade recycled material, as it is a drop-in replacement that allows them to incrementally increase the sustainability of their supply chains with a blend of both recycled and new materials.

(2) Smart & Functional Packaging

Smart packaging – technology-enhanced packaging that monitors, tracks, and communicates product data – is gaining traction as a venture investment area. Innovations like RFID, QR codes, and embedded sensors enable real-time traceability and product monitoring across the supply chain. The trend is underscored by AgroFresh’s 2023 acquisition in a go-private transaction as the company continues to expand its intelligent packaging capabilities for food safety and quality control.

By combining innovative sensor technology with wireless data collection and analytics, startups like Evigence Sensors and Blackbear act as freshness management platforms, offering additional value to corporate customers looking for traceability and/or increased interaction with their customers on pack. This sensor + analytics model allows companies to capture recurring SaaS revenues rather than being limited to per-unit sales, making them a stronger fit for venture capital.

(3) System-Wide Circular Solutions

At the system level, companies like MUTA and Magnomer are advancing the use of PCR plastics via enhanced traceability and sharing and drop-in solutions that improve recyclability without disrupting existing production lines. In logistics, startups such as Sojo Industries, which raised $40M from S2G Investments, are streamlining automated packaging assembly through track-and-trace software platforms. Ex: MUTA, Magnomer, Sojo Industries

The majority of the companies working in these innovation areas are early-stage. Many are engaging in initial pilots with corporate partners and working to understand the key milestones and operational constraints that must be met to achieve commercial scale. At Supply Change, we see immense opportunity for venture capital and corporate partnerships to fuel the growth of these solutions in tandem, driving the next generation of startup innovation in alignment with customer needs.

Conclusion

The next generation of sustainable packaging solutions will be built alongside end customers in the food & beverage industry, through partnership models in the early stages of commercialization. We see sustainable packaging solutions not as a mere one-to-one substitution, but as a multi-faceted transition that expands the functionality of packaging.

We’re especially interested in solutions that:

• Improve recyclability and/or carbon emissions with drop-in manufacturing solutions

• Meet or exceed the high bar for functionality and food safety set by corporate customers

• Enhance product traceability and monitoring in addition to sustainability requirements, providing dual value to customers, and

• Engage in early and substantive collaboration with corporates to support both development and scale.

If you are developing an innovative solution that addresses real industry concerns across the packaging value chain, share your opportunity here – we’d love to hear from you!