people often switch ideas in the middle of YC, so there are more than a few who get up on stage with just a couple week's worth of work (if even that). By ugly ducklings in this case he means ideas that may not yet be fully fleshed out or well understood - he's making no statement about the teams themselves, which is what the selection process "solves."
It's worth noting that in the original story of The Ugly Duckling, the "ugly duckling" is actually a cygnet (baby swan) that looks out of place next to the ducklings it grows up with, and that no one respects until it grows into a beautiful swan. So an ugly duckling would be an idea that will turn out very well even if it looks a little dubious at the beginning.
