Prior to the foundation of Frictional Games, Thomas Grip and Jens Nilsson had been working as freelance artist and musician, respectively, and having never worked professionally in the video game industry, where both had only minor backgrounds in programming. In 1999, Grip started developing freeware games under the name GripDesign, creating Fiend (2001) and Energetic (2005). For the development of Energetic and an unreleased title named Unbirth, Grip worked together with Nilsson as the games' sound designer, and in 2006, the two agreed to join forces, officially founding Frictional Games on 1 January 2007. The team set out to create a new survival horror project, starting by developing their own game engine that would eventually become the first iteration of the HPL Engine. Built upon this engine they made Penumbra, a tech demo to display the engine's capabilities, which later evolved into their first game, Penumbra: Overture, which they released in partnership with Paradox Interactive on 30 March 2007, and was followed its sequel, Penumbra: Black Plague, as well as its expansion, Penumbra: Requiem, in 2008. The series was heavily inspired by the Silent Hill series, however, aimed to achieve an equal or higher level of fright, without employing puzzle or action techniques, that the series' games prominently used, and rather focusing solely on the horror aspect. The series in total was a financial success, but not the result Frictional Games had hoped to produce, with the game incorporating a lot of issues, Frictional Games holds the publisher, Paradox Interactive, responsible for.
It was, however, their next title that would gain them widespread acknowledgement: Over an exactly three-year-long timespan, the team developed an improved second iteration of the HPL Engine 2, and created Amnesia: The Dark Descent upon it. A new intellectual property, the game was more inspired by Resident Evil, but again aimed for what Penumbra set out to be. Frictional Games self-released the game on 8 September 2010, and to generally favorable reviews, however, Frictional Games noted that they expected the game to struggle to find popularity and fail commercially as a result of choosing not to contract a third-party publisher and digitally releasing the game by oneself. This turned out to be false, as the game sold 36,000 copies within the first month, and a total of 1,360,000 copies within the first two years, earning the company a total revenue of about US$3,6 million in contrast to their US$360,000 development budget. Amnesia: The Dark Descent was followed by Amnesia: A Machine for Pigs in 2013, which was developed by Dear Esther developer The Chinese Room. Nilsson stated that they chose The Chinese Room because the team at Frictional Games felt that they did not know how they should continue the Amnesia series and that a misattempted Amensia game would "fail miserably", wherefore they opted to invite to third-party developer and give them input and advice on horror aspects, while the other studio would be responsible for the actual storyline and gameplay development. During the time of A Machine for Pigs' development, Frictional Games started working on a third HPL Engine iteration, as well as a new title that would eventually become Soma, which was then announced shortly after the release of A Machine for Pigs. Soma was released by Frictional Games on 22 September 2015, again to generally favorable reviews but higher sales than Amnesia: The Dark Decent within the first days, selling 92,000 units within ten days (in contrast to the 10,000 first-week sales of Amnesia: The Dark Descent), and 450,000 units in its first year (in contrast to the 390,000 first-year sales of Amnesia: The Dark Descent). In 2016, Frictional Games announced that, due to the high sales of Soma, they entered the production of two new titles, codenamed Secret 1 and Secret 2.
The HPL Engine, named after H.P. Lovecraft, was created by Grip as part of the development of GripDesign's Energetic from 20 December 2004 to 18 April 2005. Titled HPL Engine 1, the first iteration of the engine was expanded on until 2008, when Penumbra: Requiem was released, and concluded to pave way for HPL Engine 2, which would go on to be used in the Amnesia series, and HPL Engine 3, used for Soma. On 12 May 2010, Frictional Games released HPL Engine 1 into an open-source branch, licensed under GPL Version 3.