Apple - A software update is required to use this startup disk - does not update
I faced this problem yesterday (and I solved it), here's the context:
TLDR; On the "Startup Disk Selection Screen", that appears after holding Option, connect a wifi network by searching for yours on the dropdown list). Doing this when the "it is necessary to make an update" screen appears and the computer will download the updates, make the update, automatically reboot, and you will be able to proceed with the installation without any problems.
Full Context: I wanted to have 2 different MacOS versions on my computer, so I created a Bootable USB with BigSur Installer (did all of this on my Catalina OS). I also partitioned my HD to install the other MacOS version of the mac but this is not relevant.
After creating this booable USB, I restarted my PC and held the Option key so I could see my bootable USB in there. I tried to install my new macOS Big Sur but I faced this same message "A software update is required to use this startup disk". I couldn't update choosing this option, I was stuck on the "try again screen". I solved this by doing the steps in the "TLDR" section above.
Hope it helps someone!
In light of my discussion with Alan, I went out and got a dedicated USB-C Flash drive and it worked.
We concluded (not fact) that using something like a USB-C Hub would not work as it requires some sort of driver/software (that does not run within macOS recovery) to fully support it's functionality as it can support things like HDMI and ethernet, hence the reason the Mac wanted to updated something that didn't actually require an update.
Yet again, this is still an assumption, not fact. If you run into something similar for the future, then I recommend trying a dedicated USB-C flash drive (no hubs, extenders or converters).