The Onion started as a free coupon paper for the University of Wisconsin-Madison, with associated humor articles. I'm not sure how long ago, but my high school classmates and I were looking at the print version in 1990. The quality of the writing was good enough to make it popular, and as of 1996, they were distributing the free papers to Denver and the University of Illinois-Champaign-Urbana as well as in Madison. I can only assume that the coupons were altered to apply to the local businesses.
The rise of the internet is directly responsible for the astounding critical (and presumably, commercial) success of The Onion today. As soon as they got a website, those in the know who read the print version started spamming copy-and-pasted articles from the site all over Usenet.
In 1999, the Onion released one of the best history books of all time, Our Dumb Century, which collected fictional front pages of the paper from the years 1900 to 2000. They have also published other work of more dubious quality, such as reporter Mike Leow's book Tough Call, and the Not for Broadcast album, in which the writers attempt to record audio sketch comedy.
In Q1 2000, CNN.com reported that The Onion has moved its main office from Madison to New York City.
The Onion's website is at http://www.theonion.com/
It is updated every Wednesday.