What YC is complaining about is that they've been turned into Google's farm league.
The thing is, Google doesn't develop anything new. Everything new they make fails horribly, so they can't and don't compete with YC in the way that you think.
Examples of failed Google homegrown technologies include:
- Social media: Google Buzz, Google+
- Messaging: Google Chat, Hangouts, actually there's too many to list
- Video: Google Video
Almost all of Google's successful products are acquisitions:
- Homegrown: Search, Gmail
- Acquisitions: YouTube, Analytics, most of their adtech stack, Android, DeepBrain (the people who did all the AI work at Google)
Furthermore, whenever Google or Facebook buys any startup, that startup gets an immediate moat and capital injection that can be used to crush any other startup that didn't sell out fast enough. So YC only has one option for an exit: sell the company to Google at a price Google decides.