It came up in a time when raising money without connections was hard-to-impossible and there was a lot of young talent eager to take a swing at the startup game.

Y Combinator had the reputation and credibility instantly (as opposed to other, mostly undistinguished, incubators) so it could take equity at extremely advantageous valuations-- justifiably, because just being able to say you're YC improves the value of your company by at least 1.1x (probably 1.5-2x).

The problem right now is that it seems to be a "feeder school" for traditional investment, and it won't be able to replace VC outright. YC is an impressive and commendable project, but its value is prestige and it's hard to scale without losing it.