Facebook only gets screwed if their own valuation doesn't increase enough to match the amount "overpaid" in response to Instagram's acute "increased valuation" ploy.

Given current market conditions, particularly in terms of fawning over Facebook, the negative effects of this ploy seem likely to be largely externalized, with the amount of burden borne by Facebook promising to be negligible. As usual in the trading game, the bulk of the burden will fall on the unanointed schmucks lacking the information to buy low and sell high.

Is it really "investing" in this case? What was being exchanged besides pure profit?

Spending endless nights building and selling companies is laudable, and well rewarded already. "Taking that money to invest" is an entirely unrelated task and needs to be done on the same playing field the rest of the investing public has to play on.

You're saying essentially that the ethics of how you spend money change depending on how you got it. How can that logic possibly work?

And your point is?

Drug kingpins spend considerable effort building their operations, often at considerable risk to their own safety.

Does that risk and hard work mean that we should simply accept their corrupt activity and influence?

Corruption is corruption.