Single cell RNA-Seq offers an unbiased approach to discover new cell types, and to infer molecular events in tissue differentiation. But which molecular differences matter for cell function? I will show successes - and failures - of discovering novel cell states and inferring dynamics from single cell RNA-Seq, using examples from our lab. I will then show how genetic lineage tracing, combined with single cell RNA-Seq, allows identifying cells states with differences in functional potential in hematopoiesis and in embryonic development.