The Watermelon Woman was produced on a budget of $300,000, financed by a grant from the National Endowment for the Arts (NEA), as well as a fundraiser, and donations from friends of Dunye.

The film was partly inspired by and dedicated to the memory of such Black actresses as Louise Beavers, Hattie McDaniel, and Butterfly McQueen.

In 2021, The Watermelon Woman was selected for preservation in the United States National Film Registry by the Library of Congress for being "culturally, historically, or aesthetically significant".

After interviewing cultural critic Camille Paglia, Cheryl visits the Center for Lesbian Information and Technology ("CLIT"), where she finds an autographed photo of Fae Richards signed for her "special friend" June Walker.

[11] The Watermelon Woman was made on a budget of $300,000, financed by a $31,500 grant from the National Endowment for the Arts (NEA), a fundraiser, and donations from friends of Dunye.

[15][7] The production team decided against going to the Library of Congress to obtain materials and license them due to the costs, so instead Dunye and Zoe Leonard created new footage meant to resemble films from the 1930s and had playwright Ira Jeffries take additional photographs in the same style.

"[17] The mockumentary explores the difficulty in navigating archival sources that either excludes or ignores Black lesbians working in Hollywood,[15] particularly that of actress Fae Richards whose character bore the name that provides the title for the film.

[11] The film also features a number of appearances by homosexual art figures such as Cheryl Clarke, Camille Paglia, David Rakoff, Sarah Schulman and others.

"[14] She praised the "footage" of Fae Richards and Zoe Leonard's work on the photo archive of the fictional actress as "one of the film's joys".

"[23] He said that while "[p]oking fun at various sacred cows in American culture", it "makes statements about the power of narrative and the ownership of history.

"[23] In a review for The Austin Chronicle, Marjorie Baumgarten called the film "smart, sexy [...] funny, historically aware, and stunningly contemporary.

"[24] Kevin Thomas, writing for the Los Angeles Times, called the film a "wry and exhilarating comedy, at once romantic and sharply observant.

The site's consensus states, "An auspicious debut for writer-director Cheryl Dunye, The Watermelon Woman tells a fresh story in wittily irreverent style.

[34] On June 14, Julia Duin wrote an article for The Washington Times, quoting DeLombard's review and questioning the $31,500 grant given to Dunye by the NEA.

[36] Because of this controversy, the NEA restructured itself by awarding grants to specific projects rather than giving funding straight to arts groups for disbursement.