Microsoft has declined an option to significantly expand its computing contract with British AI start-up Nscale at a data centre site in Texas.

The decision deals a fresh blow to the company as it prepares for a planned $35 billion stock market listing.

According to sources familiar with the matter, the US tech giant opted not to exercise an option to more than double the scale of its existing rental agreement for computing power in Ward County.

While Nscale secured a deal with robotics firm Figure in September and maintains a reported £103bn total backlog, the loss of Microsoft’s potential expansion leaves the neocloud provider needing to secure new clients to capture billions in anticipated future revenues.

The setback comes amid mounting financial and political scrutiny over the heavy debt loads required to construct artificial intelligence infrastructure. Public backlash against the massive energy and resource demands of data centres became a prominent issue during the recent US midterm elections, with incoming Democratic leaders, including in Texas, calling for moratoriums on new developments.

Nscale, backed by Nvidia and led by Josh Payne, reported a net loss of $1bn on $141mn in revenue during the first half of 2026. The start-up has previously faced hurdles, including Microsoft withdrawing from a $3bn deal to lease capacity at a UK facility in Essex, alongside construction delays and local opposition at its flagship West Virginia site.

Despite the Texas setback, a person familiar with the situation stated that Microsoft’s decision will not impact Nscale’s overall contract backlog. Nscale remains in active discussions with other potential customers for its Texas facilities and is reportedly negotiating with Anthropic to expand lease arrangements at its West Virginia hub.

Representatives for both Microsoft and Nscale declined to comment on the development.