INTRODUCTION Impaired bladder function in children and adults often causes lifelong morbidity, as functional therapeutic approaches in this field are nonexistent. If reconstructive procedures are required, intestinal tissue is used as a gold standard for bladder repair. As this procedure is associated with significant long-term complications there is a strong clinical need for alternative sources of stable and reliable bladder tissue, of which stem cells are considered most promising. Areas covered: This review focusses on the recent development in stem cell use for bladder bioengineering. Further, we discuss the importance of the microenvironment in stem cell differentiation, function and tissue regeneration and its effect on the development of functional bladder tissue. Expert opinion: Functional bladder bioengineering requires a complex approach that involves the development of a multi-layered scaffold, with each layer offering a specific microenvironment for the generation and support of the respective cell type used in its redevelopment. The formation of cellular cross-talk within and between the layers is the key in this process. While autologous stem cells may provide a viable source of tissue for bladder reconstruction, their in situ activation combined with repair of the diseased microenvironment may offer better, more lasting solutions for functional bladder regeneration.