While this is the pitch they made while David was at Condor it was not the origin of the idea for the game. As David mentioned on Friday at the GDC Post-mortem,

While this is the pitch they made while David was at Condor it was not the origin of the idea for the game. As David mentioned on Friday at the GDC Post-mortem, he had the original idea in Highschool for a more traditional turn-based, tile-based RPG. The music, art direction and many other elements that made Diablo an innovative game actually came organically and much later.