For starters, default to not install the crapware.
Alternatively, instead of creating more required user actions than necessary. While the software is installing, show splash screen type adverts of software the user may also be interested in installing with a way to add them to the install queue on the fly or select it after the install is done.
Sure, they rate of install will be shit, but if they were really interested in doing the right thing this wouldn't be a problem and the users of said applications would be legitimate users, not just angry computer illiterate people.
That's just it -- they aren't.
The sole purpose is to generate revenue. They don't make money when users don't install the software.
So the population IM attracts are precisely those unscrupulous developers and programs that profit from questionable behavior. Working in a proper manner runs counter to their customers' goals.
The examples are usually just advertising other products they own, or features within their software so not exactly direct examples but its not a huge jump by any means.
While I agree the population of customers they will attract are those shady toolbar guys, it certainly doesn't follow that they cannot make a business out of pushing good software. I think as long as they tailor the ads to relating software or software people will likely install alongside the current piece it could work. Taking the high road could even payout bigtime down the line when more developers catch on and realise it won't detract from their image/brand by using such a service.
I don't think this statement is really fair. If you read the previous post about this, he was clearly surprised and troubled, and he again seems troubled here. He also mentioned in a comment in this thread  that he didn't seem to know about InstallMonetizer, and that the team is working on a different product.
The facts here are simple:
1. There are somewhere in the neighborhood of 50 startups in the current YC batch (http://ycombinator.com/w13smaller.html).
2. They are all coached by around 7 active partners (http://ycombinator.com/w13smaller.html) and perhaps some program alumni.
3. But those people also continue to support participants from past batches too.
4. This is (so far) an isolated incident -- YC hasn't even had time to change any of its procedures, even if it deems it necessary to do so.
5. Immediately after it being brought to his attention, PG followed up with the owners and they made some changes as a result...
6. ...even though they aren't in YC for IM, YC has no real influence or control over IM or even the team.
So what's your expectation here? Should YC be performing a full background check on participants? If IM wasn't mentioned during the application or interview process, how reasonable is it to expect YC to have known about it? Are we supposed to expect someone at YC to be able to glance at something like IM and sense whether it's icky or not, or are we supposed to expect them to spend hours digging into it?
A program like YC is bound to attract some bad apples eventually (and we don't even know that these guys are "bad"), especially since YC explicitly looks for people doing things that might seem questionable at first.
It's listed on the LinkedIn pages of both co-founders as their current business, together with AdMonetizer as a previous business. I assumed that checking the LinkedIn pages of applicants and taking a brief look at the websites of their businesses would be a minimum background check, but I guess I assumed incorrectly.
A) Your purported argument about scale really suggests that YC may have more investments than they can reasonably manage, but that doesn't absolve them from blame. This is EXACTLY the same argument Rupert Murdoch made (We have so many newspapers that we couldn't possibly be aware of hacking at one paper)
B) Your sixth fact is
6. ...even though they aren't in YC for IM, YC has no real influence or control over IM or even the team.
C) Your second and third fact focus on partners and alumni. They have additional senior staff, so how was this allowed to happen? If the partners and alumni did share the same mores as PG purports to hold now, and if at least one partner or alumnus dealt with IM, then there's an internal inconsistency (akin to blaming rebekah brooks for what is really a cultural issue)
D) Your fourth fact tries to argue that this is a single bad apple. It's the first instance being reported. Of course it's an isolated incident insofar as no other company attempted the same effort, which is exactly what James Murdoch claimed regarding News of the World.
E) " Immediately after it being brought to his attention, PG followed up with the owners and they made some changes as a result..."
The problem is that the underlying problem wasn't resolved. PG decided to point to the TOS, which doesn't address the nature of the business model. This is akin to James pointing to ATT's terms of service and security model.
I'm pretty sure that for whatever "fact" you wish to throw there's an analogue, and until there's some sort of real "accountability" I don't see how you could have such unwavering support.
My expectation is simple: if YC wants to invest in those types of firms, that's their prerogative and they should own their decision. Don't try to pull some cognitive dissonance. Just say that you are comfortable with investing in the malware model, and this entire discussion would be moot. The only reason my reply makes sense is because PG and YC claim to aspire to something higher. If we all drop that assumption, then the original issue is really irrelevant.
And with regards to your last comment: " YC explicitly looks for people doing things that might seem questionable at first.", I think you misunderstand what 'questionable' means there. Questionable there means "i doubt it could succeed", not "shady business practices".
And, again, even if someone knew about IM -- even if it was mentioned on their application as a past project -- there is absolutely no reasonable expectation that YC's principals should have looked far enough into it to come to the same conclusions that other people here did.
Furthermore, I'm not sure where people are getting the notion that YC funds things on some moral basis. As far as I know, there has never been any statement to that effect, nor is it supported by data. At most I would say only that YC looks for startups that "make something that people want". You seem to be on some kind of mission to "expose" YC, except that all you're really doing is exposing what you have imagined YC to be. This makes you look silly, not them. Every single batch, there is at least one thread on HN wondering why YC funded some company or another, usually because people disagree with the business model. Yet, people are still surprised when YC funds something they disagree with.
I did not at all misunderstand what questionable means. I used it exactly as I meant to.
Finally, your continued comparison to Murdoch is beyond absurd. You are performing a slightly more contemporary version of Godwinning this thread. I shouldn't dignify it with a response, but, Murdoch was found to have been willfully ignorant of what was going on, all while there were widespread (and well-founded) allegations that in fact the top-level executives of his various companies were (and still are) carrying out his wishes in spirit, if not in letter. The News of the World incident was only the one that they happened to get caught at. Only the most imaginative mind could find some kind of allegory between that situation and this one.
the IM team did not "pivot" while in YC
You are trying to claim that YC has divested its interest. Clearly that didn't happen -- if it already did, then PG wouldn't have had to respond. Stop trying to change the subject by focusing on the application -- the problem you are trying to avoid explaining is on the fact that somehow they went from state A to state B, a massive shift, without anyone at YC noticing (ironically, this is exactly the storyline in the News of the World scandal that you find criminal in one case and plausable in another). YC is a significant investor in most of these companies and (based on their claims) has a sufficiently frequent engagement with the companies that it would be hard to pivot without them noticing.
"I'm not sure where people are getting the notion that YC funds things on some moral basis."
I don't think they are, but PG is in a state of cognitive dissonance: he is trying to claim that he is being "moral" by not sponsoring spam yet is profiting from the practice. That's the part that rubs me wrong (and, incidentally, another aspect of the phone hacking scandal that rubbed me wrong) Defending cognitive dissonance is not just silly -- it's deceptive and does a disservice to silicon valley.
Honest question: why not?
Seems reasonable, even if only to protect brand image.
Any sort of parasitism is trying to circumvent this process by convincing others that they need software that isn't directly needed for the problem at hand or otherwise forcing people to install software. And that's the type of behavior styled as "questionable" in this discussion. Tactics like omitting a "no thanks", while perfectly legal, seem as questionable in many other contexts.
If you are right, it's not because no good software aught to be promoted and thus this (and by extension of your logic most any type of promotion) can't be legit, but rather that there doesn't exist a non-scummy way of conducting this particular type of promotion. Is that true?
Sure, advertise the crap out of your product, but do it in contexts where people expect to see them. It's like I'd let a friend through my doorstep, and a random salesman tried to sneak in while doors were open.
And first make sure that whatever you're promoting has any value for user. I'm yet to see a single thing install-bundled that is net-positive for user.
It's certainly a questionable company, they either didn't bother to scan for open source software being rebundled, or deliberately chose not to scan, because they knew the result would be bad.
Edit: Reading some of your other comments in this thread confirms that you're assuming a lot of things that aren't true to build an internal narrative and participate in this silly little drama. YC is not controlling at all, and is frequently not directly involved with guiding a company, unless the founders reach out for advice. It's a self-directed program.