Good day. Large language models dominated the latest wave of artificial-intelligence innovation, bringing the technology into software and internet applications. But an expanding group of investors believes the next phase is set to bring AI further into the physical world.

Venture-capital investments in physical AI—a branch of artificial intelligence that embodies the technology in hardware to interact with the real world—have begun ramping up. Through Feb. 25, global venture-capital funding for physical AI reached $26.7 billion, including $16 billion raised by Alphabet’s autonomous vehicle company Waymo, according to data from Crunchbase. The total is more than any annual investment before 2025.

Even without the outsize Waymo investment, funding for physical AI in 2026 is on pace to nearly double the $33.5 billion invested last year.

“This is where the next real race is,” Nicole Fraenkel, a partner at Khosla Ventures, said, “and we’re just at the inflection of the hockey stick curve of all the capital going into this space.”

Fraenkel is among a growing number of investors who believe physical AI has huge potential. The technology, she said, will usher in a different economics around manufacturing, new types of warfare, and revolutionize medical care access.

“This is coming for every spatiotemporal workload,” she said, “meaning the forklift in the factory, the drone surgical robot, the robotic arm picking bags of peaches off of a conveyor belt.”

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And now on to the news...

AI infrastructure. Nscale Global Holdings said it raised $2 billion at a $14.6 billion valuation, a sign that investors continue to see promise in the artificial-intelligence infrastructure startup as it seeks to roll out data centers.

• The U.K.-based company said Monday that Nvidia, Dell Technologies and Nokia were among the investors that backed the Series C funding round, led by Norwegian industrial group Aker and venture capital firm 8090 Industries.
   
• The move shows that investor appetite for companies in the data-center business remains strong despite concerns that tech giants might be overspending on AI. 
   
• Nscale, which builds and operates data centers, currently has facilities in Europe and the U.S., according to its website. The company said the latest funding round would help it speed up the development of AI infrastructure across Europe, North America and Asia.

Kai, an artificial intelligence-powered cybersecurity startup, has raised $125 million in a combined seed and Series A round, the company said. The raise, announced Tuesday, adds the year-old venture to a growing list of early-stage startups capitalizing on booming investor demand for smart cyber tools. The round was led by Evolution Equity Partners and included venture-capital firm N47 and other investors. “You need AI to fight AI,” said Kai co-founder and Chief Executive Galina Antova. “Attackers aren’t waiting for security teams to catch up,” she said.

Archer Aviation, a company that designs electric flying taxis, sued Joby Aviation, alleging that its rival spent years deceiving federal regulators and investors by concealing extensive ties to Chinese suppliers. The suit filed Monday in a California federal court alleges that Joby’s actions undermine national security and run contradictory to its branding as an “American-made” air-taxi manufacturer. Joby has spent more than a decade operating a manufacturing subsidiary in Shenzhen, China, and that entity benefited from technology-development grants directly from the Chinese government, according to the suit. Alex Spiro, an attorney for Joby, said the company “doesn’t respond to nonsense.”

Inflation picture is muddied. The surge in oil and gasoline prices amid the Iran conflict has darkened the inflation outlook. It is coming at a time when the outlook was already more confused than usual. The reason: There are two main measures of inflation, and they are telling opposite stories right now. How this gets resolved could be even more important for inflation than what happens in the Middle East.

Funds

Michelle Volz, a former Andreessen Horowitz partner, launched Pax Ventures and a $50 million debut fund. The new firm is focused on early-stage founders building in industrial-scale markets.

People

Vintage Investment Partners said David Chiodo joined the firm’s investment team. He was previously a vice president at Sagard Private Equity Solutions.

Cloud security startup Orca Security appointed Rachel Nislick as chief marketing officer. She most recently served as vice president of revenue marketing at Darktrace.

Rhoda AI, a Palo Alto, Calif.- based robotics startup, landed $450 million in Series A funding from investors including Khosla Ventures, Mayfield, Capricorn Investment Group, Leitmotif, Prelude Ventures and Premji Invest.

Isembard, a London-headquartered startup manufacturing high-precision components for sectors including aerospace and defense, secured $50 million in Series A financing led by Union Square Ventures.

Silverflow, a cloud-native payment processing startup, scored $40 million in Series B funding led by Pincus Capital. The company has offices in Amsterdam, the U.K. and New York.

Qevlar AI, an agentic AI security operations center platform, picked up a $30 million investment led by Partech and Forgepoint Capital.

Sandbar, a New York-based maker of a smart ring that captures thoughts via voice, raised $23 million in Series A funding led by Adjacent and Kindred Ventures.

Avvoka, a London-based legaltech platform, snagged a £14 million (about $19 million) growth investment led by Valhalla Ventures.

Axiomatic AI, a Cambridge, Mass.-headquartered startup building infrastructure for verified engineering intelligence, was seeded with an $18 million investment. Engine Ventures led the funding, which included participation from Kleiner Perkins, Big Sur Ventures and Liquid 2 Ventures.

Augur, a London-based AI platform focused on protecting critical national infrastructure, grabbed a $15 million seed round led by Plural.

Axiom Trust, a Las Vegas-based trust administration startup, emerged from stealth with $11.8 million in funding led by Lightspeed Venture Partners.

Lux Aeterna, a Denver-based space infrastructure startup building a fleet of reusable satellites, was seeded with a $10 million investment led by Konvoy Ventures.

Shiva, a São Paulo-based startup helping entrepreneurs create global products through the use of AI, nabbed $10 million in pre-seed funding led by Monashees.

Coral, a New York-based energy-efficient building upgrade finance platform, fetched $7.5 million in seed funding led by ResilienceVC.

Anchr, a New York-based startup building an AI-native operating system for food distributors, obtained a $5.8 million pre-seed investment from a16z speedrun, Anterra Capital, Offline Ventures, Long Journey Ventures and others.

• Anthropic Sues U.S. Defense Department, Pete Hegseth for Targeting the Company
   
• Anthropic’s Standoff With the Pentagon Shakes Up AI Talent Race
   
• Live Nation Reaches Settlement With DOJ in Antitrust Case
   
• Nasdaq Partners With Kraken in Plan for 24/7 Tokenized Stock Trading
   
• I’m a College Student. Gen Z Sports Betting Is Wrecking My Friends’ Lives.

• OpenAI’s IPO hopes face skeptical investor community (The Information)
   
• Will the Pentagon’s Anthropic controversy scare startups away from defense work? (TechCrunch)
   
• Amid wave of kids’ online safety laws, age-checking tech comes of age (Reuters)

This newsletter was compiled by Matthew Strozier, Zachary Cole and Brian Gormley. 

Share your tips, comments and questions: vcnews@wsj.com

The team: Matthew Strozier, Yuliya Chernova, and Brian Gormley.

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