One can classify a design as a 'bad design' when he looks at it from 'analysis' perspective. 

People do not use an app or (any product for that matter) to analyze. They use it to consume.

Yes, Instagram came at a right time but reasons apart, it did a few things very well from the perspective of most users.

And that's all that mattered.

Let us take an example of WhatsApp, Instagram's cousin: WhatsApp does not allow to @Mention people's name. If WhatsApp provides that functionality, it can be insanely more useful (less noise (especially in groups), more relevance etc.) ... but users don't look at it that way. They look at it from just consumption perspective and sharing text, photos, videos and audio matters to them most and not @Mention - are you seeing the point?

It is not how good or bad the product is, it is how good it feels to the consumer and, the world is full of consumers, not analysts or creators. 

Consider the example of movies. There are movies that get 1.5 or 2 out of 5 critic rating but turn out to be a huge box office success. Why? Movies are not created for critics; they are created for people (consumers). Apps are no different. Instagram or any other app for that matter.

Of course critics play a great role in making the whole industry better as they bring in critical views and thus push the creators to improve the product - but the success of the product is not dependent on them. 

And there is always an early move advantage. In the game of chess, it is said that the player with White pieces has more chances to win because he has a right to make the first move.

Bharat Geleda's answer (+ TechCrunch link) is on target and touches upon important points about Instagram's success.

Sure, the first move is going to be chaotic, imperfect and looks like a bad design (imagine how iPhone 1 looked like!) ... but being first of its kind has its own merits and often results in success at least in the short term.