It doesn't really matter if participants have a low(er) IQ, or went to a non-elite school. As long as they are capable of creating great companies. YC does all the screening to make sure they are capable of doing so.
I'm sorry, but shit like this completely ruins the design industry. You shouldn't let people get used to getting stuff for free, especially not if it's an important profession that should be paid for. If you want to practice, fine. But don't do it at the cost of others. Garages don't fix your car for free because they need to practice.
Visual design might not fix your broken business, but if done right it can turn your good business into a great business. Which is the goal of almost every startup.
It doesn't really matter what you start producing, it's that it (hopefully) sets the tone for the rest of the day. If you can do something that relates to your project, that's even better.
http://news.ycombinator.com/s2012form