Britain's most valuable AI startup, Nscale, has suffered another significant setback in the run-up to its IPO. After Microsoft cancelled a $3 billion UK lease earlier this year, the company has now also lost the tech giant's intent to exercise a data centre expansion option in Texas, dealing a double blow to its $35 billion listing ambitions.

Citing three people familiar with the matter, the Financial Times reported that Microsoft (MSFT) has decided against exercising an option that would have more than doubled its existing computing lease at an Nscale site in Texas. The decision means Nscale must find a new customer for the site or forfeit billions of dollars in potential revenue. Both Microsoft (MSFT) and Nscale declined to comment.

The abandoned option follows Microsoft's (MSFT) earlier cancellation of a $3 billion lease for Nscale's Essex data centre in the UK, further eroding market confidence in the Nvidia-backed company led by former Australian crypto miner Josh Payne. Although Nscale maintains that Microsoft's (MSFT) decision not to exercise the Texas expansion option will not affect its total contract backlog of $103 billion, investor concerns over the highly leveraged operating model in the AI infrastructure sector are steadily intensifying.

Shares in Aker, Nscale's largest shareholder, fell 7.5%.

Texas Option Collapse: Disagreement Over Scale and Ownership

According to information disclosed by Nscale in October 2025, the company announced an agreement with Microsoft (MSFT) to lease approximately 240 megawatts of computing capacity at the Ionic Digital site in Ward County, Texas, with Microsoft (MSFT) simultaneously "holding an option for a second phase of 700 megawatts." However, Nscale clarified to the Financial Times this week that the option's actual scale was closer to 500 megawatts and involved additional capacity at Nscale's own site rather than the Ionic site.

According to people familiar with the matter, Microsoft (MSFT) ultimately decided not to exercise the option. This forces Nscale to seek new customers for the remaining capacity at its own site. One person familiar with the matter said Nscale has already reached an agreement with robotics company Figure to lease part of the capacity at its own Ward County data centre and has signed undisclosed agreements with other companies. Another person close to the company said Nscale is in discussions with multiple potential customers regarding the remaining capacity at its own site.

The situation at the Ionic site is more complex. According to filings submitted by Ionic Digital to the US Securities and Exchange Commission (SEC), power supply for the site's remaining capacity has not yet been secured, and Ionic reserves the right to offer expanded energy capacity to other AI, enterprise, or cloud infrastructure companies. Microsoft (MSFT) still holds a right of first negotiation at the site.

IPO Outlook Under Pressure: Double Setbacks Compound Construction Delays

The loss of Microsoft's (MSFT) commitments comes at a critical time as Nscale prepares for its IPO this year. The British AI startup, whose board members include former Meta executive Sheryl Sandberg and former UK Deputy Prime Minister Sir Nick Clegg, is targeting a valuation of up to $35 billion.

However, the company's recent fundamentals are far from encouraging. Nscale recorded a net loss of $1 billion in the first half of 2026 on revenue of just $141 million. Beyond the collapsed Texas option, its flagship site in West Virginia — the core asset underpinning a $45 billion computing contract with Anthropic — has also encountered construction delays and opposition from local residents. Meanwhile, its development projects in Portugal and Norway are still progressing.

The broader industry backdrop adds further pressure. According to the Financial Times, investors have grown increasingly cautious about the highly leveraged buildout model of "neocloud" companies such as CoreWeave and Nebius. In the US midterm elections, public discontent over AI data centre construction has become one of the reasons behind the defeat of incumbent Republican candidates, with Democratic candidates in multiple states, including Texas, calling for an immediate moratorium on data centre development.

Backlog Provides Some Cover: Anthropic Negotiations May Be Key Variable

Despite the challenges, Nscale currently holds a total contract backlog of $103 billion, and Microsoft's (MSFT) Texas decision does not affect this figure. The company is also in negotiations with Anthropic to expand their partnership, proposing to lease an additional 460-megawatt second data centre at its largest West Virginia site.

For Nscale, whether it can quickly secure new customers for the Texas site and advance the Anthropic expansion negotiations will directly determine its future financing capacity and IPO progress. The neocloud business model relies heavily on long-term contracts to underpin borrowing for data centre construction. Losing partial commitments from Microsoft (MSFT) as a strategic anchor customer means the company's narrative in capital markets will face stricter scrutiny.