His answers are convincing rebuttals to a superficial criticism. In particular, I can tell you that if this startup can measure that it has a positive viral coefficient, it's already light years ahead of Yelp. And he's right that Yelp has basically no market share outside of a few US cities -- that's why they had to buy a much smaller competitor (Qype) just to get a foothold in Europe.

But to your point, I believe it was a YC partner (or three) who said that big businesses tend to start in a niche where a small number of people love you. If this guy really walked into a room and said "we've got a small, revenue-generating product with a positive viral coefficient and a growing user base", the line "fine, but you'll never beat Yelp" is not a compelling counterargument -- it's a lot like telling early AirBnB that they'll never beat Hilton.

I don't know if that's what actually happened -- there could be any number of reasons why a startup gets rejected after a ten-minute interview that aren't captured in a polite rejection email -- but in general, criticizing small startups for being small is not a winning strategy.