I dunno about the undergraduates thing; if they have a killer demo, I think they'd still get in (though they'd probably need to be willing to take a leave of absence if the company has the capacity to succeed at the end of the program). But it also reduces the frustration that everyone feels (including other groups) when one group fails to launch due to lack of commitment to building a company.
Besides that, the number of applicants has sky-rocketed, and they can't take everyone. Having a demo just makes it clear what you're trying to build and that you have the capacity to build it.
