I wouldn't worry so much about #2 unless the market is extremely small or you're looking to raise money or your only vision of success is a giant company.
Most markets with existing companies serving them are big enough to support a small indie company. And there are things you can offer as a small company that's difficult for big company's to offer.
That's true, but personally, I would be really hesitant to get into a market with several large dominant players without a significant edge. The reality of business in the US is constant consolidation towards a small number of huge, anti-competitive players. I can't find the source right now, but I've seen statistics that the total number of businesses in the US is much smaller today than it was, say, 50 years ago.
So I think your expectation, assuming you are in the US, is that your business has one of a few trajectories:
* You deliberately aim for a market with many small businesses and forces that go against consolidation. There are fewer of these over time, but anything explicitly local, has few economies of scale, or where consumers specifically target variety is a good place to look. Think restaurants, luthiers, and other "craft" businesses. Then you can have a long moderate term success while staying small. You probably won't get rich but you might like your life.
* You try to grow very rapidly to get to be a big fish before the other big fish eat you. You take a ride on the VC train and if you're lucky escape with your soul intact.
* You aim to get bought. You lose the experience of it being your business but you might get rich in return.
* You get crushed or bought against your will. Short of simply fading away from lack of success, this is probably the most likely outcome.
Most markets with existing companies serving them are big enough to support a small indie company. And there are things you can offer as a small company that's difficult for big company's to offer.