I don't want to be a jerk to kids in their early 20s who are bootstrapping their startup idea, but reading this account would actually confirm for me why this team wasn't ready to be accepted into YC or a similar program.
A big part of the onus of the original product, at least, as it was launched, was that it was "watermark free" and the way it was "sold" to end-users was that it was a free service. Now, I can understand the initial rationale here -- you want to get users, you start with free, and assume you'll pivot to paid options/add-ons at some point or get sponsorship or other revenue streams, or pretend it's still 2009 and that startups with no revenue can obtain ridiculous valuations and then be acquired by Yahoo or whatever.
The problem is, it's no longer 2009 and investing strategies have changed. Revenue has replaced users as the important growth metric for lots of investors. (There are exceptions, I'm aware, but this is a general trend we've seen over the last few years. Don't worry founders, the pendulum is bound to go back in the other direction in another few years.)
Now, I don't know what the team's original business plan was for this service, but based on the YC letter, it appears that they said "we'll start charging eventually" and that led to the question about why you aren't already trying that now, when you have 35,000 MAU. A fair question -- and one that really represents more of a question about business plan rather than lack of MRR.
But the team read this as "if we can show MRR, we can prove we're ready" -- except that wasn't and isn't the problem here. Yes, it's impressive that the team was able to hack together a payment gateway and offer a pro product in a weekend and obtain $500 in revenue (should be noted that this isn't recurring and it won't be clear what the actual recurring revenue is for several months), but the fact that it was done so haphazardly, and honestly, for what looks like the wrong reasons (it wasn't about "this is best for the business" it was about "this will get us into YC"), is the biggest red flag.
If you want to change a fundamental part of your product (no watermarks) and make it a pro feature to entice users to pay, you're welcome to do that. It may or may not work for existing users, and it's possible there are better ways to extract revenue/add value. The truth is though, this was an idea done at the last minute to try to secure placement in an accelerator, it doesn't appear to be born out of actual business rationale for the product.
