The founders had an idea for a database hosted on the web(?), and pitched it to some VCs. They had been working on it as a side gig.
Naturally, the VCs asked: did you do it on company time? Did you communicate via the company's email system?
Nope, came the answer. We thought about that and built this email system to exchange messages while we worked on the product.
And the VCs eyes lit up: tell us more about this email system!
In this post-mortem talk [0] on Diablo 1. The creator mentioned his worst business decision - the Hotmail guy offering 10% of the company in return for an office in the back they weren't even using, and he rejected it.
According to him, the pitch was: "I'm going to make email over the Internet".
His response: "Dude, that's the dumbest idea I've ever heard! What are you talking about, I already have my email over the Internet - this isn't even an invention!".
14 months later, that 10% was worth $40 million. Meanwhile they agreed to do Diablo only for $300k for Blizzard, and that was a bad deal - they even had to find more contracts to compensate it.
https://en.wikipedia.org/wiki/Outlook.com
Ahh.. never knew that's where the name comes from.