The CHIPS Investment Process: Move Fast and Break Nothing

Our procedure diverged from the typical grant process — and had a clear payoff

Sara O’Rourke is the former COO and Acting Head of the CHIPS Investment Office. She was the sixth employee at CHIPS and helped design, stand up, and run the investment process responsible for allocating $39B across the semiconductor value chain, in addition to hiring and leading the investment team, which largely hailed from Wall Street. In the change in administrations, Sara co-led the transition for CHIPS into the new administration.

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The CHIPS Program Office had a mammoth task: we had $39 billion to allocate and two years to do it. To get the job done, we’d need to negotiate with some of the most sophisticated companies in the world.

Startups often try to “move fast and break things.” But as a high-visibility, high-stakes federal program, we had to move fast but break nothing. To strike that balance, we needed to design a dynamic, outcomes-oriented process that gave us more discretion in decision-making and applicant engagement without sacrificing consistency or fairness. We quickly decided to update the typical grant procedure to emulate best-in-class private investment processes.

Our process was not seamless, and we certainly learned many things the hard way. But by the end of those two years, we had designed and stood up the new process, trained over 100 reviewers, and allocated $34 billion of the $39 billion to over 20 projects that advanced almost all the goals set in our Vision for Success (with $2 billion more allocated in preliminary term sheets)¹.

Typical grantmaking wouldn’t have helped us meet our goals

The standard competitive grant review process is highly structured, formulaic, and “arm’s length,” limiting interaction with applicants. It’s also slow. Here’s how it typically goes:

1. The announcement: An agency publishes a notice of funding opportunity (NOFO) with clear guidelines on what is expected of the applicant and project, and what evaluation criteria will be used to review applications. Funding levels are often prescribed (e.g., X% of capital expenditures or Y% of total project cost).

2. The application: Applicants submit massive application packages with highly detailed project information.

3. The review: Review teams (which often include external experts) score applications. Evaluation typically follows a points-based rubric, with some consideration for other factors, such as available funding or strategic priorities.

4. The decision: The agency announces the recipients and funding amounts.

Throughout the process, interactions with applicants are usually minimal and highly structured to ensure equal treatment per the Administrative Procedures Act (APA). The scope of a project does not change after submission, and reviewers have little discretion in how projects are evaluated on the whole — it’s all about the rubric.

This process’s main advantage is that it is easily defensible: no one can claim the government played favorites or made “arbitrary and capricious” decisions, the APA legal standard that haunts all federal programs. But as discussed earlier in this series, we wanted to manage that oversight risk in a new way: we wanted to judge our success by our outcomes, not our process.

The stakes for failing to deliver were too high; we needed a results-driven process that would help us manage the complexities of our mandate.

Our program had to make investments in a highly volatile and rapidly evolving sector. We’d need a rigorous diligence process to ensure our investments would benefit the US taxpayer. We also needed to craft award agreements that aligned incentives, ultimately funding projects that would encourage a flywheel of investment and create a robust domestic semiconductor ecosystem.

Given our wide-ranging goals, we had a diverse cohort of applicants representing the entire semiconductor value chain. Some were large, publicly owned companies building $20B+ facilities to manufacture cutting-edge chips for AI, while others were small, privately owned foundries manufacturing legacy chips for defense purposes. Some were expanding and modernizing older facilities, while others were building new ones. Some were clearly commercially viable in a well-known and established market, while others were developing and scaling newer technologies. We needed the discretion to evaluate projects individually and as part of a portfolio. While we regularly asked ourselves whether we could have just gotten by with a traditional tax credit, that model wouldn’t have enabled our goals.

But borrowing from private equity would. A typical private equity diligence process takes a rigorous and holistic view of a company, reviewing the overall market dynamics, product or technology, company financials, risk and growth prospects to determine whether to make an investment, and if so, at what price.

Taking a page from private equity

We ultimately landed on a new approach to industrial policy. Since our process was the first of its kind, we hired top Wall Street and industry talent who understood commercial diligence and deal negotiations as well as the intricacies of the semiconductor industry. We also spent significant time training the 100+ staff involved in evaluations. And for oversight purposes, we documented everything.

While still a four-part process, our revamp allowed us to move quickly, shape outcomes, and enforce accountability. Our process consisted of:

• An abridged statement of interest

• An optional pre–application

• Full application submission and review, followed by preliminary term sheet for meritorious applicants

• Due diligence and award

1. Statement of interest (SOI)

In this phase, applicants submitted a short project description to demonstrate their interest in the program. We ended up receiving over 690 in total. We used these submissions for planning, and not for evaluation.

Early, low-effort submissions helped fill the pipeline. The semiconductor supply chain is among the most complex in the world, and our investments had to cover it all. We were without a blueprint and had no idea how many companies would apply; the SOI phase let us identify potential gaps in our pipeline, which led to building a proactive “go-to-market” function that sought out companies and projects that had not expressed interest but that we wanted to recruit to apply. We travelled to Taiwan, Japan, Korea, and across Europe to boost awareness and interest based on pipeline gaps, ensuring we targeted foreign companies across the supply chain.

That global outreach helped us succeed. For example, we initially did not see any advanced packaging projects in our pipeline, despite being the next critical breakthrough needed to overcome the limits of Moore’s Law. The US had less than 3% of packaging on its shores (and barely any advanced packaging), so we reached out to the top foreign companies in that sector to encourage them to build in the US. We ultimately awarded funds for three advanced packaging clusters, and the sector is now growing rapidly in America.

Gauging interest early also helped us properly allocate our resources. SOIs gave us a sense of how many pre-applications and full applications we would receive each month, letting us plan resources (such as hiring and procurement of consultants) accordingly. Without our SOI data, we might not have hired as aggressively across our investment, strategy, and legal functions and would likely have had to slow down our review processes.

2. Pre-application (optional)

Next, applicants could opt to submit a high-level project overview and project financials. In this phase, the CHIPS team provided formal feedback on strengths and areas that needed more development, offering a recommendation on whether to submit a full application, revise the project before submitting a full application, or not submit an application at all. This phase allowed applicants to get feedback on their projects without the effort of submitting a full project package. It also set the stage and working relationship with our applicants, which was critical when we were navigating the toughest parts of full application negotiations down the line.

Pre-applications multiplied the return on CHIPS dollars and led to more ambitious projects. Our teams met regularly with applicants (often multiple times a week) to learn about their projects and offer feedback. In pre-application feedback letters, we offered guidance on project scoping and financing. We recommended changes to capital stacks to catalyze more private capital and reduce reliance on government funding. We also pushed applicants toward bolder aspirations, such as challenging them to build on faster timelines, add more capacity, or push to a more cutting-edge technology.

The pre-app phase also helped us set expectations. Our leading-edge applicants, for example, had initially requested over $70B in collective funding for their fabs, exceeding the $39 billion we had to allocate. In the pre-app phase we signaled that they should expect much less, and ultimately funded multiple clusters for ~$26B total². Another applicant submitted a project for a new technology that seemed to be a minor improvement on an enterprise technology use case, which we indicated would be low priority for us; they returned with a proposal that would represent a total breakthrough in AI datacenter chip technology.

Pre-apps also let us manage our time and prioritize projects based on economic and national security impact and need for CHIPS funds. We flagged high priority projects for expedited review, provided feedback to some projects that were promising but needed work, and told low priority projects not to submit a full application. This helped us tailor our full application pipeline to high-priority projects that served our target outcomes. While we received 167 pre-applications, we told over 50 applicants not to apply. Most took our advice, and we ultimately cut our pipeline down to 92 full applications, a large portion of which were deemed meritorious. Early vetting enabled us to allocate our resources more efficiently and not waste them on low-value applications. It also saved the companies time, sparing them the effort of compiling a full project package if they didn’t have a chance at funding.

3. Full application (and PMT) phase

To formally apply for the program, applicants submitted a formal application with detailed project and financial information, including driver-based financial models.

Our internal deal teams conducted a holistic review to determine whether or not the application met our criteria, the most important of which were the project’s impact on economic and national security outcomes and its commercial and financial viability. The Investment Committee would then decide whether to move a given application to a Preliminary Memorandum of Terms (PMT, or short term sheet) or to deny the application. For projects moving to PMT, we conducted detailed modeling to determine the level of funding needed (e.g., within 5-15% of capital expenditures). In some cases, we suggested scope changes to push applicants further, such as proposing new facilities or products.

Our full application process enabled us to evaluate a diverse set of projects and build a strong, diversified portfolio of outcomes. Because we used a qualitative and holistic review process, our deal teams and Investment Committee were able to spend less time reviewing, debating, and tabulating scores, and more time discussing each project’s economic and national security impacts and underlying investment thesis. It also allowed our teams to account for the complexity and nuance of “economic and national security impact” and assess how well vastly different projects could meet our target outcomes.

We were also able to protect taxpayer dollars by reducing information asymmetries between government and the private sector. Our teams conducted assessments that were much deeper and more wide-ranging than the typical grant review process. We pursued detailed financial diligence to build independent views of company financials, analyzing market dynamics using internal expertise and external datasets. Based on the data, we crafted our own assumptions to test applicant claims. Our teams also engaged regularly across the industry, interviewing customers and investors on market and product dynamics, and engaging applicants directly to pressure test the project’s potential impact and viability. By building a process that let us engage freely with applicants and the market and leverage multiple sources in our review, we were able to make more informed decisions.

More information helped us rightsize funding for each applicant, stretching the impact of each CHIPS dollar. For applications we wanted to advance to PMT, our teams conducted bespoke sizing of awards. We wanted to make sure projects were economical for the least amount of CHIPS dollars and that we were catalyzing, not crowding out, private capital. We analyzed everything from internal project returns to the cost basis of alternative geographies, ultimately arriving at a proposed funding level and a view on how the applicant could shore up more private capital. For one chipmaker, funding was informed by the cost of doing business in Singapore; for another, it was more about the cost of manufacturing in Germany versus the US. Some projects only needed 5% in funding to clear their hurdle rates and remain globally competitive, whereas others, such as suppliers who were not able to access tax credits, needed upward of 35% of project funds. In some cases, we told applicants to identify additional sources of non-government capital before we would consider moving to a preliminary term sheet.

4. Due diligence and award

Once we agreed on a PMT with an applicant, we kicked off a commercial diligence process to surface and mitigate any risks, relying on external transaction advisors. Our attorneys and deal teams partnered with outside counsel to negotiate a final Other Transaction Authority (OTA) agreement with the applicant, which detailed specific milestones and operational outcomes tied to tranched funding.

Our award process enabled us to shape priorities for each applicant. As in previous phases, our teams pushed companies to think bigger: to build faster, onshore more capacity, and do more for workforce development. At this stage, we challenged some of the leading edge and advanced packaging players to commit to more fabs than they had originally planned, and to accelerate their production timelines. We also pushed several defense players to expand their products to commercial markets to ensure their commercial viability. We were able to tailor additional commitments based on how each applicant could help us achieve our target outcomes. For one legacy chipmaker, the highest priority was securing inventory and manufacturing capacity in the event of a potential shortage (as seen in the COVID pandemic); for another, it was ensuring chips made in Taiwan were onshored faster.

Our award documents aligned incentives with our applicants via milestone-based payments. To ensure our goals for the project were aligned with those of our applicants, we defined specific operational and technical milestones for each applicant, unlocking funding only when those outcomes were achieved. We calibrated those milestones based on the outcomes we needed from each applicant: for some, we wanted to see customer commitments to ensure success; for others, we wanted to see funding secured; for others, it was about hitting operational or technical milestones on an accelerated schedule. In this way, we were certain we would only spend money if our applicants were achieving the outcomes we had agreed on.

Taken together, our process looked a lot more like a private equity or investment process than a typical grant review process - and as a result, helped us achieve the outcomes we needed.

Reflections for future programs

There is much active debate about the extent to which federal investment programs like CHIPS can more effectively incentivize industry versus traditional tools like tax credits. Tax credits are simpler in many ways - they are neutral and can be easier to administer. But when the aspiration is bold and the industry needs to move in ways it has not previously, it can make sense to leverage direct investment programs.

In the end, any program should be judged based on its outcomes. The CHIPS incentives program — enabled by our process — has been uniquely able to shape outcomes and enforce accountability. We were able to challenge applicants to pursue more ambitious projects to meet our economic and national security goals. And embedded milestones made funding contingent on achievement, so we were more assured of the reward.

CHIPS also made a good case for how to judiciously grant discretion within government funding processes and allow for more dynamic private sector engagement. We benefited immensely from taking a more collaborative approach. By having discretion delegated to our review teams and Investment Committee, we were able to tailor project outcomes and more effectively negotiate to protect taxpayer dollars.

Our process was not perfect, and it was tough to roll out (more to come on that!). But it gave us the latitude needed to achieve our goals, serving as a good model for future federal investment programs.

1. Our Vision for Success outlined our target outcomes in each area of the value chain. We reviewed how we did in The CHIPS Program Office Vision for Success: Two Years Later. The current administration continues to build upon these achievements with new investments and awards.

2. A semiconductor cluster is a concentration of facilities in a region, including a major semiconductor manufacturer, its critical suppliers, and other entities needed for a sustainable semiconductor ecosystem (such as R&D facilities, design and test companies, universities, and workforce development actors).