Hair follicle stem cells and dermal papilla cells play essential roles in the cyclical hair regeneration process. However, compared with the recent progress of follicular stem cell research, detailed analysis of dermal papilla cells is virtually unknown. We have focused on a large chondroitin sulfate proteoglycan molecule, versican, and prove its pivotal role in hair follicle induction both in vitro and in vivo. First, we examined versican expression with hair cycling by in situ hybridization (mRNA) and immunohistochemistry (protein). Results clearly showed specific versican expression in anagen onset of dermal papilla cells implying a function role of versican in hair induction. We then generated transgenic lines with LacZ or green fluorescent protein reporter genes under a versican regulatory element (promoter) control, and confirmed dermal papilla‐specific activation of the reporter. These transgenic lines were utilized to isolate the dermal papilla cell population by means of a fluorescent activated cell sorter.While freshly isolated dermal papilla cells were able to induce hair growth in a skin reconstitution assay when grafted with undifferentiated epidermal cells, this ability and versican expression were rapidly lost during passages in culture. In order to examine the functional role of versican in hair growth induction, versican full‐length cDNAs were transfected into inactive passaged dermal papilla cells. Impressively, this forced expression of versican molecules partially restored hair inductivity of dermal papilla cells in a skin reconstitution assay. These results demonstrated the pivotal role of versican in hair induction both in vitro and in vivo and will connect the missing link between the signal from dermal papilla cells to follicular stem cells, and initiation of hair regeneration. We have also shown that the hair growth‐promoting compound, cyclosporin A, can upregulate versican expression implying the application of a novel screening approach for hair growth‐promoting compounds by monitoring versican expression as an indicator.