Diabetic patients suffer from the loss of insulin-secreting β-cells, or from an improper working β-cell mass. Due to the increasing prevalence of diabetes across the world, there is a compelling need for a renewable source of cells that could replace pancreatic β-cells. In recent years, several promising approaches to the generation of new β-cells have been developed. These include directed differentiation of pluripotent cells such as embryonic stem (ES) cells or induced pluripotent stem (iPS) cells, or reprogramming of mature tissue cells. High yield methods to differentiate cell populations into β-cells, definitive endoderm, and pancreatic progenitors, have been established using growth factors and small molecules. However, the final step of directed differentiation to generate functional, mature β-cells in sufficient quantities has yet to be achieved in vitro. Beside the needs of transplantation medicine, a renewable source of β-cells would also be important in terms of a platform to study the pathogenesis of diabetes, and to seek alternative treatments. Finally, by generating new β-cells, we could learn more details about pancreatic development and β-cell specification. This review gives an overview of pancreas ontogenesis in the perspective of stem cell differentiation, and highlights the critical aspects of small molecules in the generation of a renewable β-cell source. Also, it discusses longer term challenges and opportunities in moving towards a therapeutic goal for diabetes.