Diabetic retinopathy, a major cause of blindness, is characterized by a distinct phenotype. The molecular causes of the phenotype are not sufficiently clear. Here, we report that deletion of transforming growth factor β signaling in the retinal microenvironment of newborn mice induces changes that largely mimic the phenotype of nonproliferative and proliferative diabetic retinopathy in humans. Lack of transforming growth factor β signaling leads to the formation of abundant microaneurysms, leaky capillaries, and retinal hemorrhages. Retinal capillaries are not covered by differentiated pericytes, but by a coat of vascular smooth muscle-like cells and a thickened basal lamina. Reactive microglia is found in close association with retinal capillaries. In older animals, loss of endothelial cells and the formation of ghost vessels are observed, findings that correlate with the induction of angiogenic molecules and the accumulation of retinal hypoxia-inducible factor 1α, indicating hypoxia. Consequently, retinal and vitreal neovascularization occurs, a scenario that leads to retinal detachment, vitreal hemorrhages, neuronal apoptosis, and impairment of sensory function. We conclude that transforming growth factor β signaling is required for the differentiation of retinal pericytes during vascular development of the retina. Lack of differentiated pericytes initiates a scenario of structural and functional changes in the retina that mimics those of diabetic retinopathy strongly indicating a common mechanism.