Corporate venture capital or CVC funds will continue to boom in China, industry observers said.

CVC funds are different from traditional venture capital or VC firms. While the latter are by and large driven by the goal of maximizing returns on their short-term investments, CVC funds such as Intel Capital, Google Ventures and Alibaba-backed Blue Pool Capital accord priority to strategic, long-term objectives.

That's because financing new ventures that promise innovations could help them discover synergies with existing businesses.

In the fourth quarter of last year, CVC funds invested $536 million in 14 startups, seven of them tech startups.

CVC funds are on the rise because the product cycles have been getting shorter. So, big businesses need to be nimble to adapt to the latest industry trends and consider outsourcing some of their research and development work to startups, said Tian Xuan, assistant dean and professor at the PBC School of Finance, Tsinghua University.

"Think about it. Is it possible that Coca-Cola could keep competitive power over decades by relying on only one single product? No," said Wang Yue, partner of Beijing-based incubator cyzone.cn. "What will replace smartphones in the future? Even handset companies may not know. So, it's imperative for large corporations to find ways to innovate faster."

CVC funds could help in this context. In recent years, Chinese CVC funds such as those of Tencent Holdings Ltd, Alibaba, JD.com and Baidu Inc, have gathered momentum in terms of investments.

Chinese CVC funds invested a record $4.25 billion yuan in the third quarter of 2015. That was partly due to ride-sharing company Didi Chuxing's F round financing of $3 billion.

Tian said CVC funds have two advantages. One is that it is easy to exit the startups they back via an IPO, mergers or acquisitions. The other is that startups backed by CVC funds tend to have high valuations, which could make exits profitable.

"CVC funds allow startups to test ideas on an immense scale of the parent. The long-term funds also enable startups to take the trial-and-error path to success," he said. "Many startups go through 99 failures and may succeed at the next attempt. A traditional VC firm can't wait that long.

"But CVC funds have a relatively weak independence, as they are controlled by parent companies and have to follow the strategic plan."

Han Jingyan contributed to the story.