A traffic-choked corner of east London seems an unlikely rival to Silicon Valley. But Google has just moved in – and some of Britain's brightest minds live next door. James Waterson reports

David Cameron hopes it will kick-start economic growth and his government has dedicated enormous resources to ensuring it succeeds.

But on a shabby side street near the Old Street roundabout in east London, Ramona Leru, of Riccardo's Sandwich Bar, is unaware that she's at the centre of Europe's fastest-growing technology hub. "The Google? Moving next door? No, I haven't heard anything about it."

That will change fast. The web titan's decision to lease a seven-storey building just off the so-called "Silicon Roundabout" is seen as a vindication of No 10's desire to transform a collection of former warehouses and print works into an entrepreneurial centre to rival California's Silicon Valley.

What began with a handful of fledgling internet businesses attracted by the low rents and local cultural scene has become a benchmark by which the Government's growth agenda will be judged.

The first inkling of the area's potential came when Last.fm, a British music start-up, was bought by CBS for £140m in 2007. Matthew Sheret, the company's "data griot" ("A new role...I'm employed to tell stories with data") explains why they chose to base themselves there. "It was just an interesting space: relatively cheap, full of similar companies and with plenty of gigs in the evenings," he says.

Dodging the foam bullets and plastic balls at their open-plan HQ ("We used to have a ball pit, but someone took it for an art project"), Sheret points out the allure of being in close proximity to fellow innovators. "It's about the brain-food, it's about the people who are around this area, people who can see how the internet might develop".

There is a risk of this high-talk slipping into waffle; when London was last at the vanguard of a new-media movement at the turn of the century it lurched into self-parody, as brutally satirised by Chris Morris and Charlie Brooker in their 2005 television series Nathan Barley. One start-up admitted that a visitor once described their office as looking like "the set of The Social Network but staffed by hipsters; all skinny jeans and thick-rimmed glasses." However, today's Shoreditch entrepreneurs are more interested in corporation tax rates and immigration restrictions than the cut of their trousers.

Mike Butcher has been tracking the scene since it began to pick up "in about 2008". He co-founded TechHub (described on its website as "a community space reflecting the vibrancy and global outlook of the technology scene"), a members' club where young companies can rent office space for below the market rate.

"We put together a business model that would be like Soho House for geeks," he says. "But instead of high-priced club sandwiches and cocktails it provides what start-ups want: super-fast wi-fi, great coffee and likeminded people. We've had people coming in from Paris, Berlin, Slovenia. They have to be here to do marketing and raise finance."

Such devotion to organic growth and ad-hoc interaction explains why David Cameron's November 2010 vision for a larger, quango-backed "East London Tech City" was initially greeted with cynicism. It appeared to be a case of politicians trying to latch on to the latest fashion in search of good press. But since then the number of tech companies in the area has increased from 200 to more than 500.

"Like anyone, you expect that government initiatives will get quietly dropped," says Butcher. "But I've been pleasantly surprised. Pretty much every month there's been a No 10 meeting about how to enrich and enliven the tech start-up scene."

Eric Van Der Kleij is the endlessly enthusiastic head of Tech City Investment Organisation, the body set up to encourage businesses into the area. "It's quite exciting to work directly with No 10 – we have policies going straight in and we have ministers coming over all the time," he says.

"The Government sees it as central to their growth strategy; there are not many sectors where you can achieve low-capital-intensive growth. Here, for relatively small amounts of money, you can produce large amounts of growth, scale quickly and export very, very fast." He adds that a number of larger companies are in discussions to move to the area.

Given that the Silicon Roundabout moniker was originally a tongue-in-cheek term coined when the number of firms based there could be counted in the dozens, this may prove to be suprisingly prescient. Now recruiters such as Harvey Nash and investors Seedcamp are following the new companies, abandoning their former bases in Mayfair for the lofts of Old Street.

But the techies agree on one thing: Britain's increasingly restrictive visa rules are damaging their prospects. Ian Hogarth, 29, is a Cambridge graduate who heads up Songkick, a live music service that employs 20 people. "We just hired an amazing guy from [Silicon] Valley with loads of experience, but the current visa system is not perfect. Over a third of our team are from outside the UK," he says.

Despite this, the twentysomething entrepreneurs are warming to their close association with the Government's mission to revive the economy. "The No 10 guys came down here on their bikes and were trying to be down with the kids," says Alex Halliday, CEO of SocialGo, which sells kits that enable people set up their own social networks. "But they were really receptive to all our ideas. You can't manufacture something like the Shoreditch tech community. But you can encourage it. Seventy-five per cent of our business is in the US so we're bringing money into the UK. In this office they used to make garments, ship them abroad and make money for Britain. We're doing the modern equivalent."