started out as genuine. He wrote/directed/self financed.
Became instant joke. Too bad for even a razzie. Early internet videos/memes originated because of content like this. Then it sort of died, and really small followings built up in places like NYC and LA.
They'd start doing screenings, and at first he thought not that it was beloved or great, but definitely that people were laughing with him/the film and not at it. Then after it picked up more and more steam and started screening to larger audiences, and he began doing interview circuits like early Red Eye and others, he realized the joke for what it was and decided to "be in on it" as TCTTS said, however at times he still definitely doesn't catch all of the fun others have at the expense of it.
Then at some point apparently the Franco brothers got really high and just knew they had to turn this into a movie. Fast forward a decade from that first stoned moment, and here we are.