I've found a few direct competitors (all are other start-ups), and plenty of indirect competitors (larger more established companies (which I'm less concerned about)) to my particular idea. I understand that competition can help validate the existence of a market, but at what point do VC's feel like there are too many start-ups competing in the same space (or does that not concern them (perhaps they are just hoping to pick the best horse))? I should add that I think my target market is rather large and there would be plenty of room for all of the start-up competitors to co-exist (IMHO). For the YC application in particular, are many turned down primarily for this reason?
Can you persuade potential investors that you have a concrete advantage over competitors? Something that they can't (or won't) copy easily?
As for the size of the market, IMHO there's no such thing as "large enough for all of the competitors to co-exist" on the internet. That works maybe when you can carve yourself a geographic niche (e.g. grocery stores, banks, and there's consolidation going on lately in both markets). When online markets mature, only a handful of competitors survive (e.g. search).
You may want to try and redefine your market - as a subset of the large market you see now. Try to show how there are customers whose needs were overlooked by all other competitors, but you're going to serve their needs and thus come to dominate this niche.
No one has ever been turned down for this. We ask it mainly to see how well you understand your market.
If you feel you have a decisively superior advantage whether strategically (your idea of how to do it is better) or tactically (your technology works better) then keep at it, but realize that it's tricky with VCs. True story: Back when I pitched a startup during the good 'ol dot-bubble days, we worked a long time to put together a world class management team, prospective customers, figure out how to make money, etc. VC response: "But I just read an article in Red Herring where these two guys just announced they were going to do something similar and that their company is the global leader in the XYZ sector. Too late. Try something else."
"But", I tried to reason in vain, "How can it possibly be too late when for a year I labored to figure out how to make money, put together a great team, found prospective customer and all they did was blabber in some magazine about how they just had the idea now and they plan on being the global leader in the industry?"
"But they said they're already number one so why imitate them?"
"But how are they number one? They're just two guys in an office somewhere doing interviews about as-yet non-existent developments!"
So on the one hand you're correct, it is a proof of concept, on the other hand, many VCs, like people in all other walks of life, look for excuses to lose ... so they think if they read about an idea on a forum this morning, by the end of the day it must be well on its way to an IPO so there's no point in even bothering. Never-mind that many late-comers eventually have risen to the top and top dogs are only a few missteps away from losing critical masses of users.