SEATTLE (Reuters) - The transformation of Seattle's South Lake Union district stands as a metaphor for this city's emergence as what some would argue is the West Coast's second most important hub of technology and entrepreneurship.

Many of the glass and steel buildings were built by Paul Allen, the second-richest -- behind Bill Gates -- of the numerous ex-Microsoft employees who have taken the wealth and expertise earned in the personal computer era and applied it to new ventures.

The anchor tenant of the neighborhood is Amazon.com, the Web 1.0 retailer that, unlike most of its brethren from the dot-com era, has evolved into a lasting powerhouse. Electric streetcars hiss past its new headquarters while the lake glistens in the distance.

Among the new kids on the block is Salesforce.com, the fast-growing champion of so-called cloud computing. A five-minute walk south is Facebook's new office, double the size of its current rented space, which has jumped from three engineers to 60 in little more than a year.

Zynga, the online gaming company that is poised for a huge public stock offering, recently took up space just south of downtown alongside other start-up companies. Google has two growing centers in Seattle and nearby suburbs, with more than 900 employees.

"It is availability of talent, and relevant talent," said Frank Artale, a partner at venture capital firm Ignition, located just across Lake Washington from Seattle. "That's why we attract people to do things in our state."

Indeed, the troika of Microsoft, the mobile phone empire built by Craig McCaw, and the strong science and engineering programs at the University of Washington has created a foundation for technology entrepreneurship that is the envy of would-be Silicon Valleys around the world.

MOBILE DNA

The signs of the city's transformation from seaport and airplane-manufacturing hub to high-tech wealth generator are everywhere. Pioneer Square, the oldest part of the city, now teems with start-ups, and the hip coffee shops and eateries that cater to them. South Lake Union, the site of Boeing's first factory, is heading in a similar direction.

On the other side of Lake Washington's floating bridges, the eastern suburbs -- Bellevue, Redmond and Kirkland -- are dotted with office parks and upscale sub-divisions, which, unlike in much of the country, are still bustling.

"We have a ton of mobile DNA, a lot of software DNA, a lot of it coming from Microsoft," said Geoff Entress, a venture partner with Voyager Capital and an early-stage tech investor in the Pacific Northwest. "We have all the right ingredients, so it's not surprising to me that we are reaping the rewards of that."

Jason Karas, chief executive of Trover.com -- which makes an app for sharing discoveries with friends on their phones -- is part of the latest wave of Seattle tech entrepreneurship. He moved his family to Seattle from Cambridge, Massachusetts at the end of last year, to join the five-person development team.

"I was attracted to this environment, a place where I can have a somewhat balanced lifestyle," said 44-year old Karas, who loves skiing in the nearby mountains with his kids.

"I find the networks really helpful here. There's definitely an interest in building social capital, building community, or mojo for the next opportunity," said Karas, sitting in Zeitgeist Coffee, the city's unofficial startup headquarters near Pioneer Square in the oldest part of Seattle. "I meet a lot of people right here."

There are plenty of fellow travelers close by. It's a short walk to startup services firm Foundry Interactive, office-sharing space StartPad.org and Curious Office, an incubator and investor in online and mobile projects. Over in South Lake Union there is the Founders Co-op, where budding entrepreneurs can get advice on starting up and getting funding.

Trover, which launched this summer and already has 100,000 users, has a rich Seattle history, and is an example of companies cascading out of another. It was co-founded by one-time Microsoft star Rich Barton, who created and spun off online travel agent Expedia from the software giant and then went on to form the real estate website Zillow. Trover came out of Travelpost, originally conceived as a rival to hotel review site TripAdvisor.

"There's an awful lot of good stuff here," said Matt McIlwain, managing director at Madrona Venture Group, the other big VC firm in the area, alongside Ignition.

"Real Networks came out of Microsoft. Isilon (a network storage firm) came out of Real Networks. More will come out of that," said McIlwain, who thinks this year will be his firm's biggest in 10 years for new investments, mostly in local companies.

THE MICROSOFT LEGACY

Money from Microsoft co-founders Gates and Allen is evident all around the city, from the University of Washington's computer science department to the new Gates Foundation building opposite Seattle's iconic Space Needle.

Microsoft directly helps startups by giving them free software through its BizSpark program, while its millionaire alumni quietly guide the next generation.

Local venture capital firm Ignition was co-founded by former Microsoft executives. The firm has nurtured local success stories such as SEOmoz, maker of the world's most popular search engine marketing software, and keyboard technology leader Swype, which was sold this year.

For earlier stage investments, there is the Seattle-based Alliance of Angels, a group of 100 or so wealthy investors, many of whom made their fortune at Microsoft.

"The knowledge that comes out of Microsoft gets captured in startups pretty quickly," said Dan Rosen, a former Microsoft and AT&T executive, who chairs the angel group. "There's a realization that angel investing in startups is probably the No. 1 thing that can gear the innovation economy and create jobs. If we want to regain our economic footing, it's the best thing we can do."

The Alliance had its biggest year ever in 2010, investing $10.3 million in 33 early stage companies. Since 1997, the group has invested in more than 160 companies, the vast majority in the Seattle area.

Companies that got money from Rosen's group have been snapped up by some of the city's biggest companies: drone maker Insitu was bought by Boeing, the Coffee Equipment Company was bought by Starbucks and online book club Shelfari is now part of Amazon.

WAY TO GO

Seattle isn't ready to challenge Silicon Valley just yet.

In the first nine months of this year, venture capital firms invested $416 million in Seattle metro region companies, boosted by recent big financing rounds for local companies like Zulily, which offers daily deals on gear for kids and mothers, and traffic data supplier Inrix.

That's a fraction of the $8.4 billion invested in Silicon Valley in the same period and only 2 percent of the $21 billion that venture capital firms invested countrywide, according to a report by PricewaterhouseCoopers and the National Venture Capital Association, using data from Thomson Reuters.

It also trails the city's performance in the Internet boom. In 1999, VCs invested nearly $2.2 billion in Seattle-area companies, more than 4 percent of nationwide VC investments.

The Pacific Northwest -- with its activity focused on Seattle -- trails New York, Texas, New England and Los Angeles and Orange County in terms of VC deal value.

But Seattle is punching well above its weight for a city of only 600,000 in a metro region of no more than 2 million.

"We don't have the population of New York or the Bay Area, and only one research university, so we do lack some critical mass here," said Rebecca Lovell, chief business officer of GeekWire, a news website launched this year to focus on Seattle's tech scene.

The VC investment numbers do not capture the whole story: several home-grown companies sold out or went public this year.

In July, Electronic Arts agreed to buy local PopCap Games -- maker of 'Bejeweled -- for up to $1.3 billion. A week later Zillow raised $70 million in its initial public offering. It has a market value of $900 million.

Earlier in the year BlackBerry maker Research in Motion bought Seattle-based social contacts service Gist for an undisclosed sum, and Massachusetts-based Nuance Communications bought local keyboard technology startup Swype -- founded by one of the co-inventors of predictive texting -- for about $100 million.

"Seattle is on the rise in the tech startup world," said Don Dodge, an ex-Microsoft startup evangelist who now works for Google in the Boston area. "Ironically, I am spending more time in Seattle as part of Google than I did while working for Microsoft."

(Reporting by Bill Rigby, editing by Jonathan Weber)