This is actually how my family teaches one another how to play Fighters
We throw each other in the ring and tell them to battle.
I have taught my friends the same way
What we do is play one match and then proceed to break down the character and their inputs afterwards.
It's a teaching style that doesn't work for everyone, and in more recent times should I have to teach someone I often take more TLC to teach them before I squash them.
For the record, once its already made clear up front you're here to help them improve, I do think starting off with at least 1 all out match, and its likely resulting squashing is important. It serves two purposes. First, it lets you, see what you truly have to work with, do they exhibit basic fighting game principles but clearly don't know skull girls nuances, or does it look like this is the first fighting game they've ever played and they are completely lost. Second, it establishes a level of respect and authority for the trainee, by proving how far above them you are, you also prove that you have much they can learn from. Not that two people around the same skill level can't learn from each other, but a new player is more likely to give you're advice extra weight if they've seen first hand that you know what you're talking about.
My only issue with the squashing method is with people who only squash and nothing else. Its not impossible to learn from repeatedly getting you're bottom handed to you on a silver platter, but it takes a very special, very rare, kind of person to do so, and the majority of people not only won't learn from the experience, but will actually have their motivation to keep playing reduced until it reaches a point where they just give up entirely. Unless they tell you up front their goal is to win an Evo, you, as a teacher, must always keep in mind that even if this game to you is you're obsession, to most other players, its just a game, and its purpose for them is to provide enjoyment. If they're not enjoying themselves, even if they are improving from you're daily beat downs, odds are still high that they won't stick around, so its important to gauge they're enjoyment level, and if its poor, see if you can't find creative ways to make things more enjoyable while still serving the same ends, even if the process to greatness is slower for the compromise.
One more note. I do also often get the impression that a lot of the posters on the forum feel like new players need us more then we need them, thus the onus is on them to show us and the game respect and to shut up and listen when we're disagreeing with them. This is another poor mindset, in my opinion. Fighting games, by their very nature, require other players, and lets not kid ourselves, this isn't Street Fighter 4, our community is small and fragile and consequently we need new players more then most fighting game communities. Whether you like it or not, we really do need them more then they need us.
There's a sea of games (fighting or otherwise) out there to take up peoples time, as such, every new player we snag to the skull girls community is a small victory for the game and community as a whole, whether they never intend to be more then a casual player, or they genuinely aspire to be the next EVO champion. Just as we should help new players celebrate their victories, we should celebrate every time a new player even considers picking this game up, and should put serious effort into both getting them to take the plunge, but just as importantly, give them the encouragement and positive experience that will greatly increase the odds of them sticking around long term. The guy whose thinking about joining seems to have a bad attitude? Don't put him down for it, give him reasons to change his tune. If you care about this game (and if you're on this forum I assume you do), you do yourself and the game a disservice every time you brush off a potential new player, no matter how justified you feel in you're actions.