McDonald was born in Long Island, New York. After leaving school, McDonald pursued a stage career, with a preference for comedy and music. In 1968 he was in Shreveport, Louisiana as the local TV station's Bozo the Clown. Later he moved to San Francisco, working as a cycle courier and joining the AAA Acting Company.

He developed an interest in the teachings of George Gurdjieff but in 1974 turned down an invitation to attend the movement's training school, deciding instead to travel in Europe, armed only with a fool's hat and a melodica. In Amsterdam he met a fellow American and accepted an invitation to stay in a commune in Kentish Town, North London. There he stayed for some years, taking over a leatherworking Business from another departing American and running a leather goods stall in the newly opened Camden Lock Market.

At about this time McDonald joined another company, this time presenting children's shows in conjunction with the Inner London Education Authority. In 1982 he and another member, Hilary, left to form a three-person musical comedy troupe, The Cheap Shots, with McDonald's close friend Sakal providing the music. The threesome developed "The Chip Shop Show", a series of spoof musicals popular on the newly burgeoning London alternative comedy circuit, making many appearances at London's The Comedy Store alongside Ronnie Golden, John Hegley and others, including several Future Red Dwarf players.