As soon as you turn it competitive, you lose the benefits of this type of event, beyond those you'd get from just a con with a "best in show". While ostensibly you create what you present at the hackathon, teams with greater pre-made components get a significant advantage. To counter that you then have to lay down rules and that just brings the tone of the event down. My criticism is specifically about the usefulness of competition in hackathons, rather than about competing teams in other kinds of events.
It doesn't seem like the competition aspect is as emphasized here as in many other hackathons, which is great. I hope the prizes remain an ancillary bonus rather than the focus.