I think the reason everyone is applying to YC is because of networking and connections which is really valuable. Now, if there were 1000 companies being funded by YC it means there would be so many people with access to these connections. Which means the value of YC's network would drop. A lot of people then wouldn't feel really erged to apply while this competition the are feeling among them when applying, would be lost, if anyone with iq higher than 130 was getting funded...
*update:
more people getting funded = (lim markets - shrinks/saturation) => probability people fail > probability people succeed => bubble breaks
this will be the feelings and hopes bubble, and not investments bubble, because obviously whereas with the same money (e.g. 1 million USD) invested during 1999 only 1 company could appear, using YC's approach with the same money, more startups are given birth.
Thus this is the bubble also but not in investors return (because the rate of propability increases using YC's approach) but in founders feelings...
*update:
more people getting funded = (lim markets - shrinks/saturation) => probability people fail > probability people succeed => bubble breaks
this will be the feelings and hopes bubble, and not investments bubble, because obviously whereas with the same money (e.g. 1 million USD) invested during 1999 only 1 company could appear, using YC's approach with the same money, more startups are given birth.
Thus this is the bubble also but not in investors return (because the rate of propability increases using YC's approach) but in founders feelings...