This study investigates the influence of heating rate and short residence time (1–15 min) on the hydrothermal liquefaction (HTL) of alkali lignin, as a function of reaction temperature (280–320 °C). A novel induction-heating reactor system (IHRS) was designed and was used for rapid heating rate (∼100 °C/min), while a resistive-heating reactor system (RHRS) was used for slow heating rate (∼5.3 °C/min). The experiment using IHRS with a short residence time (1 min) resulted in the highest yield of carbon recovery in biocrude (52.2 ± 0.63 wt%) at 320 °C under autogenous pressure. In contrast, the experiments using RHRS or longer residence time (8–15 min) with IHRS showed lower biocrude yield due to the promotion of gasification and undesired secondary reactions. The detailed characterization of biocrude revealed that rapid heating rate improves the selectivity of compound in biocrude, such as phenol, while slow heating rate produced a broader distribution of compounds, including anisole and alkyl phenols at 320 °C for 1 min residence time. Furthermore, the usefulness of phenol as capping agent during IHRS of lignin was demonstrated in suppressing char formation and increasing biocrude yield.