The recent advent of induced pluripotent stem cells has enabled the study of patient-specific and disease-related neurons in vitro and has facilitated new directions of inquiry into disease mechanisms. With these approaches, we now have the possibility of correlating ex vivo cellular phenotypes with individual patient response to treatment and/or side effects, which makes targeted treatments for schizophrenia and bipolar disorder a distinct prospect in the coming years. Here, we briefly review the current state of stem cell-based models and explore studies that are providing new insights into the disease biology of schizophrenia and bipolar disorder, which are laying the foundations for the development of novel targeted therapies.