Stem cell-based therapies are a promising new avenue for treating ischemic disease and chronic wounds. Mesenchymal stem cells (MSCs) have a proven ability to augment the neovascularization processes necessary for wound healing and are widely popular as an autologous source of progenitor cells. Our lab has previously reported on PEGylated fibrin as a unique hydrogel that promotes spontaneous tubulogenesis of encapsulated MSCs without exogenous factors. However, the mechanisms underlying this process have remained unknown. To better understand the therapeutic value of PEGylated fibrin delivery of MSCs, we sought to clarify the relationship between biomaterial properties and cell behavior. Here we find that fibrin PEGylation does not dramatically alter the macroscopic mechanical properties of the fibrin-based matrix (less than 10% difference). It does, however, dramatically reduce the rate of diffusion through the gel matrix. PEGylated fibrin enhances the tubulogenic growth of encapsulated MSCs demonstrating fluid-filled lumens by interconnected MSCs. Image analysis gave a value of 4320±1770µm total network length versus 618±443µm for unmodified fibrin. PEGylation promotes the endothelial phenotype of encapsulated MSCs—compared to unmodified fibrin—as evidenced by higher levels of endothelial markers (von Willebrand factor, 2.2-fold; vascular endothelial cadherin, 1.8-fold) and vascular endothelial growth factor (VEGF, up to 1.8-fold). Prospective analysis of underlying molecular pathways demonstrated that this endothelial-like MSC behavior is sensitively modulated by hypoxic stress, but not VEGF supplementation as evidenced by a significant increase in VEGF and MMP-2 secretion per cell under hypoxia. Further gain-of-function studies under hypoxic stress demonstrated that hypoxia culture of MSCs in unmodified fibrin could increase both vWF and VE-cadherin levels to values that were not significantly different than cells cultured in PEGylated fibrin. This result corroborated our hypothesis that the diffusion-limited environment of PEGylated fibrin is augmenting endothelial differentiation cues provided by unmodified fibrin. However, MSC networks lack platelet endothelial cell adhesion molecule-1 (PECAM-1) expression, which indicates incomplete differentiation towards an endothelial cell type. Collectively, the data here supports a revised understanding of MSC-derived neovascularization that contextualizes their behavior and utility as a hybrid endothelial-stromal cell type, with mixed characteristics of both populations.