diff --git a/packages/env/README.md b/packages/env/README.md
index 9be3fe8e36709c..1f06dabf9ce710 100644
--- a/packages/env/README.md
+++ b/packages/env/README.md
@@ -7,7 +7,7 @@
 ```sh
 $ npm -g i @wordpress/env
 
-$ cd path/to/gutenberg # WordPress install will be in path/to/gutenberg-wordpress.
+$ cd path/to/plugin-or-theme # WordPress install will be in path/to/plugin-or-theme-wordpress.
 
 $ wp-env --help
 
diff --git a/packages/env/lib/create-docker-compose-config.js b/packages/env/lib/create-docker-compose-config.js
index 6cc4b8ddfabf1d..f5971723148b57 100644
--- a/packages/env/lib/create-docker-compose-config.js
+++ b/packages/env/lib/create-docker-compose-config.js
@@ -1,14 +1,15 @@
 module.exports = function createDockerComposeConfig(
-	pluginPath,
-	pluginName,
-	pluginTestsPath
+	cwd,
+	cwdName,
+	cwdTestsPath,
+	context
 ) {
 	const commonVolumes = `
-      - ${ pluginPath }/:/var/www/html/wp-content/plugins/${ pluginName }/
-      - ${ pluginPath }${ pluginTestsPath }/e2e-tests/mu-plugins/:/var/www/html/wp-content/mu-plugins/
-      - ${ pluginPath }${ pluginTestsPath }/e2e-tests/plugins/:/var/www/html/wp-content/plugins/${ pluginName }-test-plugins/`;
+      - ${ cwd }/:/var/www/html/wp-content/${ context.type }s/${ cwdName }/
+      - ${ cwd }${ cwdTestsPath }/e2e-tests/mu-plugins/:/var/www/html/wp-content/mu-plugins/
+      - ${ cwd }${ cwdTestsPath }/e2e-tests/plugins/:/var/www/html/wp-content/plugins/${ cwdName }-test-plugins/`;
 	const volumes = `
-      - ${ pluginPath }/../${ pluginName }-wordpress/:/var/www/html/${ commonVolumes }`;
+      - ${ cwd }/../${ cwdName }-wordpress/:/var/www/html/${ commonVolumes }`;
 	const testsVolumes = `
       - tests-wordpress:/var/www/html/${ commonVolumes }`;
 	return `version: '2.1'
diff --git a/packages/env/lib/detect-context.js b/packages/env/lib/detect-context.js
new file mode 100644
index 00000000000000..afc23f6dd5f6f3
--- /dev/null
+++ b/packages/env/lib/detect-context.js
@@ -0,0 +1,45 @@
+'use strict';
+/**
+ * External dependencies
+ */
+const util = require( 'util' );
+const fs = require( 'fs' );
+const stream = require( 'stream' );
+const path = require( 'path' );
+
+/**
+ * Promisified dependencies
+ */
+const readDir = util.promisify( fs.readdir );
+const finished = util.promisify( stream.finished );
+
+module.exports = async function detectContext() {
+	const context = {};
+
+	// Race multiple file read streams against each other until
+	// a plugin or theme header is found.
+	const files = ( await readDir( './' ) ).filter(
+		( file ) => path.extname( file ) === '.php' || path.basename( file ) === 'style.css'
+	);
+	const streams = [];
+	for ( const file of files ) {
+		const fileStream = fs.createReadStream( file, 'utf8' );
+		fileStream.on( 'data', ( text ) => {
+			const [ , type ] = text.match( /(Plugin|Theme) Name: .*[\r\n]/ ) || [];
+			if ( type ) {
+				context.type = type.toLowerCase();
+
+				// Stop the creation of new streams by mutating the iterated array. We can't `break`, because we are inside a function.
+				files.splice( 0 );
+				fileStream.destroy();
+				streams.forEach( ( otherFileStream ) => otherFileStream.destroy() );
+			}
+		} );
+		streams.push( fileStream );
+	}
+	await Promise.all(
+		streams.map( ( fileStream ) => finished( fileStream ).catch( () => {} ) )
+	);
+
+	return context;
+};
diff --git a/packages/env/lib/env.js b/packages/env/lib/env.js
index 3b982c0e143f56..c2ba83ac24c221 100644
--- a/packages/env/lib/env.js
+++ b/packages/env/lib/env.js
@@ -11,12 +11,13 @@ const wait = require( 'util' ).promisify( setTimeout );
 /**
  * Internal dependencies
  */
+const detectContext = require( './detect-context' );
 const createDockerComposeConfig = require( './create-docker-compose-config' );
 
 // Config Variables
-const pluginPath = process.cwd();
-const pluginName = path.basename( pluginPath );
-const pluginTestsPath = fs.existsSync( './packages' ) ? '/packages' : '';
+const cwd = process.cwd();
+const cwdName = path.basename( cwd );
+const cwdTestsPath = fs.existsSync( './packages' ) ? '/packages' : '';
 const dockerComposeOptions = {
 	config: path.join( __dirname, 'docker-compose.yml' ),
 };
@@ -34,16 +35,18 @@ const setupSite = ( isTests = false ) =>
 			isTests ?
 				process.env.WP_ENV_TESTS_PORT || 8889 :
 				process.env.WP_ENV_PORT || 8888
-		} --title=${ pluginName } --admin_user=admin --admin_password=password --admin_email=admin@wordpress.org`,
+		} --title=${ cwdName } --admin_user=admin --admin_password=password --admin_email=admin@wordpress.org`,
 		isTests
 	);
-const activatePlugin = ( isTests = false ) =>
-	wpCliRun( `wp plugin activate ${ pluginName }`, isTests );
+const activateContext = ( context, isTests = false ) =>
+	wpCliRun( `wp ${ context.type } activate ${ cwdName }`, isTests );
 const resetDatabase = ( isTests = false ) =>
 	wpCliRun( 'wp db reset --yes', isTests );
 
 module.exports = {
 	async start( { ref, spinner = {} } ) {
+		const context = await detectContext();
+
 		spinner.text = `Downloading WordPress@${ ref } 0/100%.`;
 		const gitFetchOptions = {
 			fetchOpts: {
@@ -64,7 +67,7 @@ module.exports = {
 		};
 
 		// Clone or get the repo.
-		const repoPath = `../${ pluginName }-wordpress/`;
+		const repoPath = `../${ cwdName }-wordpress/`;
 		const repo = await NodeGit.Clone(
 			'https://github.com/WordPress/WordPress.git',
 			repoPath,
@@ -94,10 +97,10 @@ module.exports = {
 		}
 		spinner.text = `Downloading WordPress@${ ref } 100/100%.`;
 
-		spinner.text = `Installing WordPress@${ ref }.`;
+		spinner.text = `Starting WordPress@${ ref }.`;
 		fs.writeFileSync(
 			dockerComposeOptions.config,
-			createDockerComposeConfig( pluginPath, pluginName, pluginTestsPath )
+			createDockerComposeConfig( cwd, cwdName, cwdTestsPath, context )
 		);
 
 		// These will bring up the database container,
@@ -121,11 +124,14 @@ module.exports = {
 			.catch( retryableSiteSetup )
 			.catch( retryableSiteSetup );
 
-		await Promise.all( [ activatePlugin(), activatePlugin( true ) ] );
+		await Promise.all( [
+			activateContext( context ),
+			activateContext( context, true ),
+		] );
 
 		// Remove dangling containers and finish.
 		await dockerCompose.rm( dockerComposeOptions );
-		spinner.text = `Installed WordPress@${ ref }.`;
+		spinner.text = `Started WordPress@${ ref }.`;
 	},
 
 	async stop( { spinner = {} } ) {
@@ -135,6 +141,8 @@ module.exports = {
 	},
 
 	async clean( { environment, spinner } ) {
+		const context = await detectContext();
+
 		const description = `${ environment } environment${
 			environment === 'all' ? 's' : ''
 		}`;
@@ -146,7 +154,7 @@ module.exports = {
 			tasks.push(
 				resetDatabase()
 					.then( setupSite )
-					.then( activatePlugin )
+					.then( activateContext.bind( null, context ) )
 					.catch( () => {} )
 			);
 		}
@@ -154,7 +162,7 @@ module.exports = {
 			tasks.push(
 				resetDatabase( true )
 					.then( setupSite.bind( null, true ) )
-					.then( activatePlugin.bind( null, true ) )
+					.then( activateContext.bind( null, context, true ) )
 					.catch( () => {} )
 			);
 		}
diff --git a/packages/env/tests/cli.test.js b/packages/env/test/cli.js
similarity index 100%
rename from packages/env/tests/cli.test.js
rename to packages/env/test/cli.js