Nscale, a UK-based artificial intelligence (AI) company with prominent board members including Nick Clegg, Sheryl Sandberg, and Susan Decker, is facing challenges as it pursues an initial public offering (IPO) in the United States later this year. The company, which filed its IPO prospectus confidentially last month aiming to raise $3 billion at a $35 billion valuation, has encountered growing investor skepticism tied to the broader difficulties confronting the so-called “neocloud” sector.

Neoclouds are smaller firms that lease data center capacity, often heavily financed through debt, to provide cloud computing power to major technology firms such as Microsoft and OpenAI. Nscale’s contracts reportedly total $103 billion, primarily with Microsoft and Anthropic, another AI company planning a November IPO. However, investor concerns have mounted following the withdrawal or delay of several data center leasing firms’ public listings.

CoreWeave, one of the largest listed neoclouds, has experienced significant financial stress, with its unsecured long-term debt trading below 80 cents on the dollar and a 15% decline in stock price on a single day last week. Similarly, Firmus, an Australian neocloud supported by Nvidia and Blackstone, recently canceled a planned $30.5 billion IPO, and AirTrunk postponed its Singapore listing.

Industry analysts have expressed doubts about the viability of the neocloud business model given the companies’ heavy leverage and operational challenges. While Nscale’s valuation may align with comparable firms, questions remain about the sector’s overall sustainability.

Operational obstacles have also impeded Nscale’s progress. Its flagship data center in Glomfjord, Norway, is reportedly six months behind schedule after suffering from construction fires and delays linked to regulatory negotiations. In the UK, Nscale’s major site in Loughton, Essex, faces a significant power supply shortfall that will limit grid access until the early 2030s, despite plans to open in 2027. The company lists five active data centers with a combined capacity of 55 megawatts and 12 additional sites under development.

The broader neocloud industry confronts further complications, including difficulties installing advanced hardware—such as Nvidia’s 72-chip racks, which required multiple redesigns due to overheating—and growing local opposition to data center projects. Public resistance has intensified in both the UK and US, with tens of thousands signing petitions against major developments by Microsoft in Leeds and near Caernarfon, Wales.

The confluence of these issues has intensified concerns about whether AI-related data center investments will generate sufficient returns to service the substantial debt incurred, especially within the aggressive timelines set by investors and companies.

Despite the turmoil, investment in AI infrastructure remains substantial. Goldman Sachs Research projects global AI spending will reach around $1 trillion in 2026, with approximately $600 billion allocated in the United States alone, representing nearly 2% of U.S. GDP.

Last week, as investors reduced exposure to neocloud stocks, capital flowed into more traditional sectors such as old economy equities and sovereign bonds, which are currently yielding near decade-high levels. The recent developments have raised questions about the durability of the AI data center market and whether the recent selloff signals more broader market instability ahead.