Simply put, The Velvet Underground's debut, The Velvet Underground & Nico, was a game-changer that, over the course of the four+ decades since its release, has served as a precursor to everything from glam-rock to punk to industrial and beyond, a deceptively unassuming album whose particular effect was best summed up in Brian Eno's famous pronouncement: "The first Velvet Underground album only sold 10,000 copies, but everyone who bought it formed a band." As the album cover suggests, the back-story of The Velvets' debut is very much about their brief stint as members of Andy Warhol's Factory, for it was through Warhol's mentoring and patronage that they were able to record (a now legendary) album that they themselves never thought would materialize. However, from the beginning of their association with Warhol, there was conflict. Paul Morrissey, an avant-garde filmmaker and factory regular, convinced Warhol that The Velvets needed a more appealing lead singer, as Lou Reed was prone to appearing withdrawn and abrasive on stage. German fashion model and fledgling singer Nico, whom Warhol had used in a few of his films, most notably Chelsea Girls, was Morrissey's recommendation to Warhol, who in turn set about convincing Reed and John Cale to accept Nico as the band's "chanteuse." Despite their initial resistance to the idea, Reed and Cale were eventually persuaded to not only accept Nico into the band, but to write a few songs specifically for her; being the intelligent opportunists that they were, they likely realized that being given new instruments, free rehearsal space, food, drugs, sex (of all kinds), and Warhol's pop-art cache were perks that few, if any, bands could ever dream of enjoying.

Warhol's first major project involving The Velvets was a multimedia exhibition called the Exploding Plastic Inevitable, which involved the band playing in front of a silent 70 minute black & white film entitled The Velvet Underground & Nico: A Symphony of Sound. Performing in the EPI allowed The Velvet Underground to regularly explore and indulge their interest in musical improvisation, a trait that would be put to use soon thereafter while recording their debut album. In 1966, the first step a band would typically take before recording an album was securing a recording contract. In the case of The Velvets, Warhol decided instead to finance the album himself with the help of Norman Dolph, a Columbia Records Sales Executive who hoped Columbia would ultimately agree to sign the band and distribute the record. In mid-April 1966, after much rehearsing and endlessly working on new arrangements intended to accurately reflect the innovative approach they had honed earlier that spring playing in the EPI, The Velvets entered Scepter Studios, an old, decrepit recording studio in New York City, with Warhol as ostensible producer to record an acetate that would be peddled to various record companies. Lou Reed has clarified Warhol's role during the recording sessions: "Andy was the producer and Andy was in fact sitting behind the board gazing with rapt fascination at all the blinking lights. He just made it possible for us to be ourselves and go right ahead with it because he was Andy Warhol. In a sense he really produced it because he was this umbrella that absorbed all the attacks when we weren't large enough to be attacked. As a consequence of him being the producer, we'd just walk in and set up and did what we always did [....] Of course, he didn't know anything about record production, he just sat there and said, 'Oooh that's fantastic,' and the engineer would say, 'Oh yeah! Right! It is fantastic isn't it?'"
Despite the austere recording conditions, The Velvets made the most of the opportunity. Norman Dolph: "Most of the actual tracks, there was only one good unbroken take, maybe two of some of them. I'll say this: at no time did anybody on either side of the glass say, well, we'll fix it in the mix. That was never said. They performed it, and they'd come in, and we'd play it back end-to-end. If there was not a simultaneous agreement, they'd go back and do it over. But usually, anything that sounded like rough or iffy or from an engineering point of view didn't please John, he or I would break it down. We'd never even finish the take. Then they'd start a new one over, and then they'd come in and say, yeah, that's it, next case. And there was never any 'I'll play it back tomorrow, see if I like it tomorrow, and if I don't, then I'll redo it.' None of that. It was all just like they'd just sung it live, and they couldn't go back and redo it, because it was live. Because we were paying for the tape at probably $125 a roll, usually the broken takes were backed up and recorded over. Otherwise there would be some interesting scraps lying around [....] It seems to me that "Heroin" was either done last, or the very first of the second day. 'Cause I remember that that was the one where Lou Reed needed to kind of get his head in the right place for that. And I remember in that one, in the control room, nobody moved a muscle when he was singing that song. And you didn't want anything to go wrong with that take at all, because if it had, he would have torn a wall down. Every bit of the energy in the song, you experienced in his persona at that point." The result, known as the Norman Dolph Acetate, ended up being roundly rejected by Columbia who didn't feel the band had any talent (ditto Atlantic and Elektra); however Morrissey managed to sell it to Verve/MGM, who promptly decided to sit on it until the following year because they had just released another "weird" album, Freak Out by The Mothers of Invention and weren't quite sure how to market The Velvets. The delay gave the band a chance to re-record a few songs under better conditions in Los Angeles while on tour as part of the EPI and to record some new material (including "Sunday Morning") with Verve staff producer Tom Wilson in New York.