As a YC applicant I feel I am in a position to offer an explanation.
Money is very hard to raise for many first time founders; 120k is a fortune at this early stage. YC offers access to its rolodex and being accepted (whether the startup succeeds or not) is a badge of validation that opens many doors internationally.
The trade-off is worth it.
Basically the way I read this is if I have a business model that is likely to require a series A eventually (i.e. not profit oriented) if I won't apply to YC I'm setting myself up for a massively worse deal later?
I suspect there's a bit of groupthink involved though, creating a feedback loop. (Well, of course there is, VC investment decisions and valuations are based on signaling from other investors!)
So, building your company, maybe not massively worse, but yes, probably at least somewhat worse. It's a tough Valley out there.
2) Investors are strongly incentivized to be greedy, so buddy-buddy systems are not in their self-interest. Most funds take a 20% cut of the profits they generate, so they are typically investing in YC companies only if they think those returns will be as good as lower-valued non-YC companies
3) FWIW, the valuations are only substantially higher for YC, and not for other accelerators (many of which are quite good). I think that is also evidence against a buddy-buddy conspiracy.
As to your question about Series As, I don't think YC has a huge effect on Series A valuations, although I haven't looked at the data there. The effect is mostly on seed valuations. I think of the YC badge as similar to a going to Harvard. When it comes to getting your first job (seed round), having a Harvard diploma is a great signal of your potential and might get you a higher starting salary. When it comes to future jobs (Series A and later), people will look more at what you've done since graduating than where you went to school.
Yes, I'm an engineer. How could you tell?