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 &quot;Startup Disk Selection Screen&quot;, that appears after holding Option, connect a wifi network by searching for yours on the dropdown list).  Doing this when the &quot;it is necessary to make an update&quot; 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 &quot;A software update is required to use this startup disk&quot;.  I couldn't update choosing this option, I was stuck on the &quot;try again screen&quot;.  I solved this by doing the steps in the &quot;TLDR&quot; section above.
Hope it helps someone!