Paul, very interesting essay, especially seeing that I (and others) are trying to do something similar in Limerick, Ireland to counter the unemployment due partially to the redundancies announced by Dell and the knock-on effect it has on the local economy.
Limerick has a good infra-structure for an effort like this; it has a very good university, an institute of technology, an international airport and is located very centrally. Whats more it has a good innovative and entrepreneurial culture. What's important is not so much the investment by larger funds but rather the very early stage investments. These will enable a good idea to be developed into a product or service tied into a company that has all the right ingredients to grow by raising larger amounts of funding and expanding it's management team. The availability of early stage funding will also create a culture of innovation, creativity and entrepreneurship.
Apart from the money there should also be hands-on support and a culture of networking and sharing of experience as well contacts.
We're trying to create exatly this through the GreenHouse (www.greenhouselimerick.com) and I am amazed by the support that we have received by individuals and the private sector.
Would love to have a chat with you sometime as there are a lot of parrallelels between Ycombinator and our plans here in Limerick.
Evert Bopp.