But big businesses suck at innovation so much that their primary form of innovation is through acquiring small businesses. But that is a big benefit for #2 as we need innovations to get to a sustainable system.

The problem is that it is increasingly difficult to survive as a small business (due to constantly increasing compliance/regulatory/legal burdens), so it makes sense to ‘sell out’ as soon as possible (or just give up early). The rate of small businesses growing into large ones has been decreasing for at least 20 years.