Is it fair for someone with privileged information to back a direct competitor? I say no but YC clearly thinks otherwise.

Yeah, to me that’s always been the obvious most "expensive" part about doing YC. It’s not the chunk of equity, it's that they now know everything about your company, your road map or ideas, and the way you think and operate. And that's a pretty good deal for whatever little money they're spending on you. The whole thing has a "frenemies" vibe.

For many investors that's a bridge they will not cross because it will always lead to conflicts of interest.