An infamous Starcraft example also contains notes of a similar story where they were so humbled by a competitor's demo (and criticism that their own game was simply "Warcraft in space") that they went back and significantly overhauled their game.
Former Ion Storm employees later revealed that Dominion’s E3 1996 demo was pre-rendered, with actors pretending to play, not live gameplay.
I got a look at an early version of StarCraft source code as a reference for the sound library for Diablo 2 and curiosity made me do a quick analysis of the other stuff - they used a very naive approach to C++ and object inheritance to which first time C++ programmers often fall victim. It might have been their first C++ project so they probably needed to start over again anyways. We had an edict on Diablo 2 to make the C++ look like recognizable C for Dave Brevik's benefit which turned out pretty well I think (it was a year late but we shipped).
Former Ion Storm employees later revealed that Dominion’s E3 1996 demo was pre-rendered, with actors pretending to play, not live gameplay.