Hair follicle (HF) development is the result of neuroectodermal-mesodermal interactions, and can be divided into morphologically distinguishable stages (induction, organogenesis and cytodifferentiation). The spacing, polarity and differentiation patterns of HFs are driven by interacting, self-assembling gradients of inhibitors and activators, which are established jointly by the skin epithelium and mesenchyme. For HF development to occur, the dominant-negative influence of inhibitors of the HF differentiation pathway must be locally counteracted by specific antagonists and/or overriden by stimulators of hair placode formation. Once a mesenchymal condensate of inductive fibroblasts has formed, it takes over control of most subsequent steps of HF organogenesis and of epithelial stem cell differentiation into distinct lineages. In this review we introduce the morphological characteristics, major underlying principles and molecular key players that control HF development. The focus is on recent insights into the molecular interactions leading to hair follicle induction, and we close with synthesizing a corresponding working hypothesis.