How many factions are there?

In Civilization 3 and 4, the armies of different nations differ only in one unit. All other units (and there are countless of them) are absolutely identical. Additionally, there are differences in the unique traits of nations (in Civ 3) or rulers (in Civ 4). Some excel in ancient times, while others have an advantage in later eras.

In Heroes, creating dozens of different races while maintaining balance is quite difficult. I voted for the last option.

Added after 11 minutes

The more, the better, as long as balance is considered!
And there are many examples to draw inspiration from: instead of inventing absurd dwarves, we have mythologies: Scandinavians, Arabs, Egyptians, Mongols, Aztecs, Slavs, Chinese. And that's just scratching the surface. There won't be any problems with worldviews either. You can create light (but light people and light mages are very different), dark, neutral (intervening in both sides), non-aligned (complete neutrality), chaos (total destruction), order (strict control), diplomatic neutrals (using whatever is convenient for them).

This is unnecessary. Otherwise, someone might not like the characteristics of their nation and declare a jihad against the developers. :D In Civ 4, for the sake of political correctness, even all religions were made absolutely identical.