The directed differentiation of pluripotent stem cells into endodermal derivatives, including insulin-producing pancreatic β cells, has considerable clinical promise in cell replacement therapies. The first step in this process is the conversion of pluripotent stem cells into definitive endoderm (DE). Here (p. 675), Douglas Melton and colleagues investigate the endodermal populations generated from mouse embryonic stem cells treated with Nodal (which is required for in vivo development of DE) or Activin A (which is thought to mimic Nodal activity). These TGFβ family members use the same signalling pathways but, although the researchers show that Nodal- and Activin-derived DE cells have similar gene expression patterns, Nodal-derived endoderm contributes much more efficiently to embryonic endoderm upon transplantation into the gut endoderm of mouse embryos. Importantly, this functional difference between Nodal- and Activin-derived endoderm extends to the subsequent development of pancreatic progenitors in vitro and maturation into insulin/c-peptide-expressing cells in vivo. These data provide a firm basis for the derivation of insulin-producing cells for disease modelling and cell therapy.