Founded by Ian Hetherington and Jonathan Ellis, the Liverpool-based Psygnosis was born from the ashes of the defunct 8-bit game company Imagine Software, where Hetherington was Financial Director. After the collapse of Imagine in 1984, the name and trademarks were bought by Ocean Software, while the rights of the software remained with original copyright owners. The first two games developed by the company, Bandersnatch (for the ZX Spectrum) and Psyclapse (for the Commodore 64), were fused into one to become Psygnosis' first release, called Brataccas. This game was originally created for the Sinclair QL, but was instead ported over to other Motorola 68000-based machines and released on the Commodore Amiga, Atari ST, and Apple Mac in 1985.
In 1999 the publishing branch of the company was merged into Sony Computer Entertainment Europe as a whole, and the Psygnosis brand was dropped in favour of SCE Studio Liverpool, which marked the full integration of the studio within Sony Computer Entertainment. Psygnosis's Camden and Stroud studios were renamed Studio Camden (later merged with Team Soho to form SCE London Studio) and Studio Stroud.