Okay turns out I was right - ZISI will do bundling for me, so no netlify-lambda required (phew!) but the package.json deps are not installed for some reason.
So I can either move all dep requirements to the root package.json (yuck!) or include cd lambda/function1 && npm install for each function as part of my build script (also yuck but for now best option).
Hopefully the Netlify team can correct me here and offer a much nicer solution/tell me that it should work and I’m just doing something wrong…