I have to say that I was really surprised with the prizes described at http://blog.railsrumble.com/2012/10/13/prizes-prizes-prizes/ . It seems modest given the sheer scale of the event (500 teams) and the size of some of the sponsors. Our local start-up weekend awarded $20,000 in cash between the top three winners, in addition to a lot of free services, and the competition wouldn't be nearly as stiff.
I think a couple of things come into play. It was far from guaranteed that 500 teams would actually sign up. The Rails Rumble didn't take place in 2011 and was fresh back this year. Also, I'd make a guess that having more sponsors reduces their interest in putting up more than they have to. If it were just a few, they'd get more out of it so might put up more goodies. Collectively, though, I think the prizes are pretty good.
(Disclaimer: I'm partly involved with the Rumble but am not involved with sponsorships at all and know no details.)