Mobile Payment Startup Square Raises $27.5 Million As Mobile Shopping Booms

Off the back of the strongest holiday season yet for mobile shopping, mobile payment startup Square has raised a round of funding worth $27.5 million. This brings the company’s total valuation to $240 million.

The round was led by Sequoia Capital, and partner Roelof Botha — a former CFO of PayPal and early investor in YouTube (NSDQ: GOOG) — will join Square’s board.

The news caps off a bumpy year for the payment company.

Square faced a lawsuit over its main product, a credit card dongle that plugs into a smartphone to process payments by either merchants or customers. And the product itself had problems working on the iPhone 4, one of the key devices targeted by the company. And in June, company founder and CEO Jack Dorsey — one of the co-founders of Twitter — wrote a letter to early users to say that the company had to suspend shipments of their dongles to deal with credit risk and fraud issues.

Things finally looked like they were turning a corner in October, when the company finally launched its commercial product publicly. Since then, the company has seen between 30,000-50,000 business sign up for the service every month, according to COO Keith Rabois, who spoke to the WSJ. Square is not reporting the size of its overall customer base.

Mr. Dorsey, speaking to the WSJ, said the company will be using the funding to expand its staff — it currently employees 64 people — and “accelerate word of mouth” about the company. One of the key targets for Square are small businesses that currently do not process credit card transactions because of the fees involved. (Square takes a fee from each transaction but presumably it is significantly smaller than those levied by Visa and merchant acquirers.)

Square raised a previous round of $10 million, led by Khosla Ventures, in late 2009, which valued the company at $45 million.