The Virtual Boy came to be through an exclusive agreement between Nintendo and the Massachusetts-based company Reflection Technology, Inc., who had developed a monochrome red LED eyepiece display called Scanned Linear Array. General manager Gunpei Yokoi kept the red LEDs while developing the console instead of using a full-color LCD display for several reasons. Both companies claimed color LCDs would have been prohibitively more expensive, retailing at $500 ($1000 when adjusted for inflation in 2023), and tests of the displays were said to have caused visual glitches such as "jumpy images" and players "[seeing] double" instead of seeing depth. Yokoi preferred red LEDs as they were the cheapest option and used a more recognizable color, and unlike a backlit color LCD, he believed the contrasting black color could add a more immersive sense of depth.

It should be noted that a full-color LED Virtual Boy was impossible to release in 1995 due to the fact that high-efficiency blue and green LEDs only became available in 1996. The Virtual Boy, which uses an oscillating mirror to transform a 1-D line of dots to a 2-D field of dots, requires high-performance LEDs in order to function correctly. Without the high-efficiency blue and green LEDs, the Virtual Boy was limited to the red LED display.