In summer 1994, Naughty Dog consisted of founders Andy Gavin and Jason Rubin, fresh off selling their 3DO fighter Way of the Warrior to Universal Studios. The deal required relocating from Boston to Los Angeles and Gavin abandoning his MIT PhD. During the cross-country drive, they conceived a 3D character action game — internally dubbed "Sonic's Ass" — recognizing that platformers like Mario and Sonic dominated console sales but had not yet transitioned to true 3D.

The team evaluated Sega Saturn, 32X, and the unreleased Sony PlayStation. Despite Sony's zero gaming track record, they chose PlayStation for its superior 3D hardware, signing a harsh developer agreement and paying $35,000 for a dev kit. Universal VP Mark Cerny, creator of Marble Madness and Sonic 2, joined as creative contributor alongside first hire Dave Baggett.

The core technical challenge was camera perspective: a 3D platformer viewed from behind the character created depth-perception issues and the "Sonic's Ass" problem. Naughty Dog's evolving solution combined three approaches — starting levels with the character facing the camera, incorporating 2D side-scrolling sections for familiar gameplay, and designing "boulder run" levels where the character runs toward the screen.

This strategy exploited a market hole: Sega had Sonic, Nintendo had Mario, but PlayStation lacked a mascot. Meanwhile, Yuji Naka avoided 3D Sonic on Saturn with Nights, and Shigeru Miyamoto was still perfecting 2D with Yoshi's Island. Mario 64 would later solve 3D platforming differently with free-roaming camera control.