The band's integration of rock and the avant-garde achieved little commercial success during their existence, but they are now recognized as one of the most influential bands in rock, underground, experimental, and alternative music. The provocative subject matter, musical experimentation, and often nihilistic attitudes explored in the band's work would prove influential in the development of punk rock and new wave music. In 2004, Rolling Stone ranked the band No. 19 on its list of the "100 Greatest Artists of All Time". In 2017, a study of AllMusic's catalog indicated the Velvet Underground as the 5th most frequently cited artist influence in its database. The band was inducted into the Rock and Roll Hall of Fame in 1996 by Patti Smith.
The foundations for what would become the Velvet Underground were laid in late 1964. Singer/songwriter/guitarist Lou Reed had performed with a few short-lived garage bands and had worked as a songwriter for Pickwick Records (Reed described his tenure there as being "a poor man's Carole King"). Reed met John Cale, a Welshman who had moved to the United States to study classical music upon securing a scholarship. Cale had worked with experimental composers Cornelius Cardew and La Monte Young, and had performed with Young's Theatre of Eternal Music, though was also interested in rock music. Young's use of extended drones would be a profound influence on the band's early sound. Cale was pleasantly surprised to discover that Reed's experimentalist tendencies were similar to his own: Reed sometimes used alternative guitar tunings to create a droning sound. The pair rehearsed and performed together; their partnership and shared interests built the path towards what would later become the Velvet Underground.
Reed's first group with Cale was the Primitives, a short-lived group assembled to issue budget-priced recordings and support an anti-dance single penned by Reed, "The Ostrich", to which Cale added a viola passage. Reed and Cale recruited Sterling Morrison—a college classmate of Reed's at Syracuse University—as a replacement for Walter De Maria, who had been a third member of the Primitives. Reed and Morrison both played guitars, Cale played viola, keyboards and bass and Angus MacLise joined on percussion to complete the initial four-member unit. This quartet was first called the Warlocks, then the Falling Spikes. The Velvet Underground by Michael Leigh was a contemporary mass market paperback about the secret sexual subculture of the early 1960s that Cale's friend and Dream Syndicate associate Tony Conrad showed the group. MacLise made a suggestion to adopt the title as the band's name. According to Reed and Morrison, the group liked the name, considering it evocative of "underground cinema", and fitting, as Reed had already written "Venus in Furs", a song inspired by Leopold von Sacher-Masoch's book of the same name, which dealt with masochism. The band immediately and unanimously adopted the Velvet Underground as its new name in November 1965.
The newly named Velvet Underground rehearsed and performed in New York City. Their music was generally much more relaxed than it would later become: Cale described this era as reminiscent of beat poetry, with MacLise playing gentle "pitter and patter rhythms behind the drone".
In July 1965, Reed, Cale and Morrison recorded a demo tape at their Ludlow Street loft, but without MacLise because he wasn't reliable enough to be tied down to a schedule and sometimes would only turn up to band practice sessions when he wanted to. When he briefly returned to Britain, Cale attempted to give a copy of the tape to Marianne Faithfull, hoping she'd pass it on to Mick Jagger, lead singer of The Rolling Stones. Nothing ever came of this, but the demo was eventually released on the 1995 box set Peel Slowly and See.