The process of angiogenesis has been well documented, but little is known about the biology of lymphatic endothelial cells and the molecular mechanisms controlling lymphangiogenesis. The homeobox gene Prox1 is expressed in a subpopulation of endothelial cells that, after budding from veins, gives rise to the mammalian lymphatic system. In Prox1−/− embryos, this budding becomes arrested at around embryonic day (E) 11.5, resulting in embryos without lymphatic vasculature. Unlike the endothelial cells that bud off in E11. 5 wild‐type embryos, those of Prox1‐null embryos did not co‐express any lymphatic markers such as VEGFR‐3, LYVE‐1 or SLC. Instead, the mutant cells appeared to have a blood vascular phenotype, as determined by their expression of laminin and CD34. These results suggest that Prox1 activity is required for both maintenance of the budding of the venous endothelial cells and differentiation toward the lymphatic phenotype. On the basis of our findings, we propose that a blood vascular phenotype is the default fate of budding embryonic venous endothelial cells; upon expression of Prox1, these budding cells adopt a lymphatic vasculature phenotype.