The VIC-20 (known as the VC-20 in Germany and the VIC-1001 in Japan) is an 8-bit entry level home computer that was sold by Commodore Business Machines. The VIC-20 was announced in 1980, roughly three years after Commodore's first personal computer, the PET. The VIC-20 was the first computer of any description to sell one million units, eventually reaching 2.5 million. It was described as "one of the first anti-spectatorial, non-esoteric computers by design...no longer relegated to hobbyist/enthusiasts or those with money, the computer Commodore developed was the computer of the future."

As the Apple II gained momentum with the advent of VisiCalc in 1979, Jack Tramiel wanted a product that would compete in the same segment, to be presented at the January 1980 CES. For this reason Chuck Peddle and Bill Seiler started to design a computer named TOI (The Other Intellect). The TOI computer failed to materialize, mostly because it required an 80-column character display which in turn required the MOS Technology 6564 chip. However, the chip could not be used in the TOI since it required very expensive static RAM to operate fast enough.

As the new decade began, the price of computer hardware was dropping and Tramiel saw an emerging market for low-price computers, that could be sold at retail stores to relative novices rather than professionals or people with an electronics or programming background. Radio Shack had been achieving considerable success with the TRS-80 Model I, a relatively low-cost machine that was widely sold to novices and in 1980 released the Color Computer, which was aimed at the home and educational markets, used ROM cartridges for software, and connected to a TV set. Atari also released in 1979 the low-end 400, aimed at the home and educational markets, in addition to the high-end 800, and both could also use cartridges and connected to TV sets.

In the meantime, new engineer Robert Yannes at MOS Technology (then a part of Commodore) designed a computer in his home dubbed the MicroPET and finished a prototype with help from Al Charpentier and Charles Winterble. With the TOI unfinished, when Jack Tramiel was shown the MicroPET prototype, he immediately said he wanted it to be finished and ordered it to be mass-produced following a limited demonstration at CES.

The prototype produced by Yannes had few of the features required for a real computer, so Robert Russell at Commodore headquarters had to coordinate and finish large parts of the design under the codename Vixen. The parts contributed by Russell included a port of the operating system (kernel and BASIC interpreter) taken from John Feagans' design for the Commodore PET, a character set with the characteristic PETSCII, an Atari CX40 joystick-compatible interface, and a ROM cartridge port. The serial IEEE-488-derivative CBM-488 interface was designed by Glenn Stark. It served several purposes, including costing substantially less than the IEEE-488 interface on the PET, using smaller cables and connectors that allowed for a more compact case design, and also complying with newly imposed FCC regulations on RFI emissions by home electronics (the PET was certified as Class B office equipment which had less stringent RFI requirements). Some features, like the memory add-in board, were designed by Bill Seiler.^{[citation needed]}

Altogether, the VIC 20 development team consisted of five people led by Michael Tomczyk, the product manager who recruited the group and dubbed them the VIC Commandos. Commodore founder Jack Tramiel initially gave Tomczyk the title VIC Czar and later appointed him product manager. Tomczyk insisted on several features including full-size typewriter keys, programmable function keys, and a built-in RS-232 interface. Michael later contracted and co-designed a $100 modem, the VICModem, which became the first modem to sell 1 million units. According to one of the development team, Neil Harris, "[W]e couldn't get any cooperation from the rest of the company who thought we were jokers because we were working late, about an hour after everyone else had left the building. We'd swipe whatever equipment we needed to get our jobs done. There was no other way to get the work done! [...] they'd discover it was missing and they would just order more stuff from the warehouse, so everybody had what they needed to do their work."

At the time, Commodore had a glut of 1 Kbit×4 SRAM chips, so Tramiel decided these should be used in the new computer. The result was arguably closer to the PET or TOI computers than to Yannes' prototype, albeit with a 22-column VIC chip instead of the custom chips designed for the more ambitious computers. As the amount of memory on the VIC-20's system board was very small even for 1981 standards, the design team could get away with using more expensive SRAM due to its lower power consumption, heat output, and less supporting circuitry. The original Revision A system board found in all silver-label VIC-20s used 2114 SRAMs and due to their tiny capacity (only 512 bytes per chip), ten of them were required to reach 5 KB of system RAM. The Revision B system board, found in rainbow logo VIC-20s switched to larger 2048-byte SRAMs which reduced the memory count to five chips: 2× 2048-byte chips + 3× 2114 (the 1024 × 4 bits) chips.

In April 1980, at a meeting of general managers outside London, Jack Tramiel declared he wanted a low-cost color computer. When most of the GMs argued against it, preferring Peddle's more sophisticated design, he said: "The Japanese are coming, so we must become the Japanese!" (in reference to the threats of low-cost systems from Japan). This was in keeping with Tramiel's philosophy which was to make "computers for the masses, not the classes". The concept was supported at the meeting by Tomczyk, newly hired marketing strategist and assistant to the president; Tony Tokai, General Manager of Commodore Japan; and Kit Spencer, the UK's top marketing executive. Peddle disagreed with the decision and left the company with other engineers, so an engineering team in Commodore Japan led by Yash Terakura helped finish the design. The VIC-20 was marketed in Japan as VIC-1001 before VIC-20 was introduced to the US.