Oddly enough, "Why did we fund you again?" is not an uncommon question at the first office hours. Often when we fund a startup, it's because of something they could do in the future. So at the first office hours when they describe what they're currently doing, that doesn't always include what we liked about the idea.
On a related note; when you first talk to a group of founders, if you feel strongly that they should be pursuing a different idea than the one they are currently pursuing, do you usually say so right away? Or do you wait for them to struggle with the current idea and ask you for assistance / advice (if that happens) before saying anything?
If that was my opinion, I'd tell them right away. Time is short during YC. But since changing course is hard, if they don't agree with me, I don't insist too hard at first.
On the other hand, sometimes it happens instantaneously. There was one group that decided to change their idea during the last tuesday dinner. I was sitting across from them and we did a back of the envelope calculation about what their revenues might be in the ideal case, and we sort of looked at one another and said "maybe time to try something new." They found the new idea 2 days ago, and it's quite good.
This part of the story defines the upside of Y Combinator for me. It isn't the cash or the inevitable writeup in TechCrunch nearly as much as the guidance.
There is no anger or disappointment expressed by PG in the story - just straightforward advice on what the group needed to do.
It actually sounded like a bit of a test as I read it. Sort of a second trial by fire, the interview being the first. It simulates the feeling of pressure (for some, at least) while the stakes are relatively low, making it easier to handle tough questions when the incubating company is pitching clients or future investors.
