The companies — two of the of the top three most popular food chains worldwide — hope to reduce the amount of plastic used in packaging.
McDonald's and Starbucks together distribute a combined 4% of the world's 600 cups that are distributed annually.
The new of the eco-friendly partnership comes as the major fast food players such as Chipotle, Subway and Burger King have also vowed to reduce their plastic use.
The initiative, known as the NextGen Cup Challenge invites entrepreneurs of all sizes to develop new materials and designs for cups.
The programme will provide grants to the best ideas and help startups develop them into market-ready products.
Starbucks and innovation investment firm, Closed Loop Partners, first launched the initiative in March and now, McDonald’s is set to join the programme.
So far, McDonald’s has contributed $5mn to the fund and McDonald’s is set to match this figure.
"McDonald’s is committed to using our scale for good to make positive changes that impact our planet and the communities we serve,” Marion Gross, senior vice president and chief supply chain officer at McDonald’s USA, said in a statement.
The partnership comes shortly after both companies announced their eco-friendly strategies for the future.
Starbucks recently pledged to be “strawless” by 2020. Meanwhile, McDonald’s said it aims to shift all guest packaging (cups, straws, etc.) to renewable or recycled sources by 2025.
"We are excited to join Starbucks and Closed Loop to help solve this pressing challenge as collaboration is key to finding a scalable, lasting global solution,” added Gross.