It was once famed for its art scene and residents with daft haircuts. But the area around Old Street, on the fringes of the City of London, has emerged as a magnet for internet startups to rival those in the US, earning it the nickname Silicon Roundabout after its famously unlovely traffic system.

Iain Dodsworth, a 36-year-old Sheffield-educated computer programmer, this week became the poster boy for the area when he sold his three-year-old firm, TweetDeck, to social network company Twitter in a deal thought to be worth about $40m (£25m) – making the once-unemployed developer an overnight millionaire.

The big-money deal is the clearest sign yet that the firms clustered in the area are capable of attracting talent that could match those of California's Silicon Valley, the heartland of technology firms such as Facebook and Google.

"It feels like a really big win for London," says Dodsworth. "It feels like there's something meaningful there. It's quite a big deal that we were even bought in the first place. We are now Twitter, and we happen to be in London – it's significant that Twitter understands the benefit of having something outside of San Francisco."

The term Silicon Roundabout was – in typically British self-deprecating style – coined two years ago as a riposte to accusations that London could never foster an environment to rival San Francisco. While the Old Street landmark does not host offices for Apple or Yahoo – and its gritty urban surrounds compare unfavourably with the rolling Californian landscape – Silicon Valley tech titans are increasingly looking to Shoreditch for their next acquisition.

"We weren't bought for £2.50 – we have shown that it's not just a little acquisition and I think that's quite meaningful," Dodsworth says, the confetti still fresh around his desk from Wednesday's announcement. "[The deal shows that] if a company is looking at acquiring smaller companies, they don't just have to look at the US. Perhaps if we were just around the corner in Silicon Valley they'd have just snapped up the team, moved them in and that's it."

Like many of east London's digital firms, Dodsworth shares a large open-plan office with about a dozen other small internet companies, including SoundCloud and MobileRoadie. The office erupted with champagne and confetti when the deal was announced, and newspaper clippings – "Twitter buys TweetDeck", "TweetDeck tycoon: I'll stay at Silicon Roundabout" – are proudly displayed across their shiny Apple computers.

The effect of "seeing this success rather than reading about it on [technology news site] TechCrunch" is something not to be underestimated – and is an integral part of Silicon Valley's history of achievement, says Dodsworth. Richard Moross, founder of digital printing business Moo.com, moved his company to Shoreditch five years ago – long before what he calls its "ridiculous" new name was coined. The office space he leases to TweetDeck and others has a waiting list of more than 20 companies.

"The reason why the Silicon Valley success story rolls on is because the people in those companies have success, share success, other people see it, they start new companies and the thing snowballs," he says. "By having people in the same area – the same physical location – that is like an amplifying device. It's a successful formula, and that's why people want to move here."

Similar clusters of technology firms have sprung up outside London. Cambridge has Silicon Fen, home to a number of hi-tech outfits including chipmaker Arm Holdings and semiconductor manufacturer Cambridge Silicon Radio (CSR). The predictably named Silicon Glen is the triangle stretching from Glasgow to Edinburgh and Dundee that includes multinationals such as IBM, Semtech and National Semiconductor.

However, web-based startups and aspirant social networks have tended to gravitate towards east London. The capital, and its resurgent tech scene, has a natural allure for twentysomething founders touting unproven business models – no doubt bolstered by the sky-high valuations being attached to US rivals such as LinkedIn and Zynga. And just as California's techies shifted from military technology to transistors, computers and eventually the internet, so too is Shoreditch, still a heartland for traditional printing, changing its spots.

To work in the same vicinity as TweetDeck inspires Nick Casey, the founder of the yet-to-launch sports social network Squadify. "Two desks over there's a serial entrepreneur who has had multiple startups and gone through the whole funding process. To chat with these people over a cup of tea or a beer is gold dust – you can't find that stuff on the internet."

Casey and fellow co-founder Andy Davey occupy a £275-a-month desk at TechHub, an expansive workspace-cum-common room just yards from Old Street roundabout. Only 11 months old, TechHub has already won sponsorship from Google. Instead of renting garage space from a friend of a friend – as Sergey Brin and Larry Page did 13 years ago when setting up Google – fledgling companies can get space at cheap rates and on flexible contracts. Just don't ask TechHub co-founder Elizabeth Varley whether she's attempting to recreate the famous San Francisco scene.

"The holy grail of Silicon Valley – that it's more a state of mind than a place – is true. It's about the way you work and the approach you take," she says. "What we did was to look at some of the success factors over there and see what we could do better – connecting people, connecting VCs [venture capitalists] with startups, large tech companies with startups – that's something [the UK] hasn't been particularly good at. While we're a workspace, that's just a basic need – the most important thing is the community of different elements of the startup ecosystem that help those young companies flourish."

Like the offices run by Moross, TechHub is full to bursting with fresh-faced entrepreneurs "sick of doing the Starbucks shuffle", as Varley puts it. A new "entrepreneur visa" for foreign businesspeople who want to invest in the UK, unveiled as part of the government's plans to create an "East London Tech City" in November, means the roundabout's summer party – which has grown from 200 revellers to 1,000 in three years – could soon be overrun by digital aspirants.

But for now the UK's leading entrepreneurs are staying sober. Varley says: "Silicon Valley has had 60 years of investment in silicon and chips … It has two amazing universities, and it's had a lot going on in the past, which means it has been able to spawn this internet boom over there – it hasn't happened overnight.

"Sometimes it takes a little more, but we're on the way."

UK's network success stories

• TweetDeck Built by Iain Dodsworth while he was unemployed and looking for a way to organise his Twitter feeds, TweetDeck has been downloaded by more than 20 million people. It is the second most popular way to tweet, after Twitter.com, so it is no surprise that Twitter bought it for a reported £25m last week.

• Mind Candy The company behind the social networking website for children, Moshi Monsters. Later this year it will launch a free iPlayer-style catchup service for its 38 million registered users, mostly aged between six and 11. The profitable Moshi Monsters series competes with Disney's Club Penguin in the UK, with merchandise sales forecast to reach $100m (£61m) this year.

• Last.fm UK-founded online music service bought by CBS for $280m in May 2007. It moved closer to profit in its most recent full-year financials, for 2009, posting a pre-tax loss of £2.8m – compared with the £17m loss in 2008. The site remains hugely popular, competing with Spotify and other big-name music streaming services.

• GroupSpaces Social network to help real-world groups manage themselves online. Founded in 2007, it won the social networking category in the UK Startups 100 awards in April. It raised $1.3m in its latest investment round, last June.

• Songkick

This four-year-old company, headed by Ian Hogarth, aims to become "the home of live music on the web" by inviting users to track gigs from their favourite artists. Hired Apple's former senior engineering manager, Dan Crow, in January as it looks to compete with the formidable Ticketmaster.