YC was started as a way for PG and Jessica to learn about angel investing. They originally gave teams like $20k for the summer and positioned it as alternative to a summer internship. They told students that if they decided at the end of the summer to quit the startup and go back to school, that was ok. They expected the cost of this education on angel investing would be some failed investments in startups. Most people back then apparently thought they were crazy for writing checks to undergrads and having them start companies -- this was in 2005, before zuckerberg, right after the dot com crash, when the world was a different place. I'm sure the YC founders thought in the back of their minds that their startups would succeed, but they probably were hesitant to say that out loud.

It's easy to take the YC model for granted today, but back then what they were doing was sort of crazy. Their insight was that these young founders were diamonds in the rough, and their brilliance was fighting for these founders when no one else would

http://old.ycombinator.com/start.html

http://paulgraham.com/summerfounder.html

http://old.ycombinator.com/old/sfp.html

Edit: readability, more links