Andreessen Horowitz revealed that it made $78 million off its $250,000 seed investment in Instagram’s billion-dollar acquisition in a post that was meant to quell criticism that it “fumbled” its involvement with the company.

“Ordinarily, when someone criticizes me for only making 312 times my money, I let the logic of their statement speak for itself,” wrote general partner Ben Horowitz. “However, in this case, the narrative that some critics put forth has the nasty side effect of casting two outstanding entrepreneurs—Kevin and Dalton Caldwell—in an unfair light and glosses over an important ethical issue that we faced.”

While Andreessen Horowitz was one of Instagram’s very earlier investors, it said it didn’t follow-on because of a conflict of interest with another company it funded. The firm had supported Picplz, another photo-sharing concept that didn’t end up having as much momentum as Instagram. The company behind it eventually changed changed course and turned into App.net, which gives other mobile developers landing pages and other tools for acquiring users.

Dalton Caldwell, who was chief executive of the company behind Picplz, was already working on photo concepts in April 2010, a month after Kevin Systrom raised $500,000 in funding for Burbn, a location-sharing concept that would eventually morph into Instagram. Instagram launched in early October 2010 and Caldwell’s company said it had closed funding in early November. Instagram later went on to take funding in a round led by a rival top-tier firm, Benchmark Capital.

Last week, The New York Times ran a story saying that Andreessen Horowitz had basically screwed up its investment in the company. The decision to fund Picplz “was a calculated bet against Instagram and it left Mr. Systrom livid,” the Times reported.

But Horowitz is framing the choice as an ethical issue:

After speaking with both entrepreneurs and much internal discussion, we concluded that funding Kevin to compete with Dalton would be a violation of the original implicit commitment we made to Dalton—to not fund competitors to PicPlz. On the other hand, funding Dalton did not violate our implicit agreement with Kevin because he changed his business—we’d funded Burbn not Instagram. So our choices were: a) invest in Dalton b) invest in neither or c) invest in Kevin and violate our commitment to Dalton. As soon as we fully recognized those were the choices, we ruled out option c and elected option a. However, we still had a problem: because we had invested in Kevin’s seed round, we had both information rights and pro rata rights to the series B. These are important and valuable rights, but it seemed completely unethical to us to exercise them since we funded a competitor. As a result, we unilaterally and without compensation or consideration gave Kevin back those rights and did not invest further in Instagram.

And note to future founders: Horowitz emphasized that what Instagram did in selling to Facebook for $1 billion is exceedingly rare. For every company like that, there are literally thousands of failures.

He added, “News to world: it generally takes longer than two years to create a billion dollars in value. What Kevin and team did was special and unique.”

This story is developing….