It depends on the player. TIBF can be inspiration, but honestly I generally ignore it. What I do ask from players is at least a bare-bones background. Where did they come from, what are their initial goals and, just as important, why those goals. I also highly encourage families or other loved ones. Even orphans have had friends or people that helped them along the way.
Depending on the player, I'll regularly have off-line conversations and a bit of back-and-forth on externals; how they feel about me introducing some things to the campaign that directly affect their PC, although some things will be revealed in-game. I even discuss broad outlines of possible character arcs, how does the player think the PC is growing and changing. If I have a thought on an arc that touches on things that may be uncomfortable I'll run it by them.
But a lot of it is simply RP at the table. Giving players the options for PCs to explore different aspects of their PC. Whether that's a disagreement with a parent or authority figure to potential romantic partners to potential business opportunities. A lot of this is just following the lead of the player and then giving them doors to go through. One of my player's PC is running a business that started as him just inquiring about what was going to happen to a business that had been destroyed in a previous session. That led into several other PCs helping him get the business started, then getting helpers and so on. More recently, one of the helpers has become a potential love interest.
I also encourage people to write stories about their PCs. It can be what they did during downtime, a story filling in details on their past, their perspective on what's been going on. It doesn't have to be incredibly in-depth.
Last, but not least, I ensure that the PC's stories matter to the campaign. That warlock? Their relationship to their patron and what the patron wants becomes important. That mention from the dwarf about how he used to make weapons with a certain symbol? Weapons with that symbol starts showing up in the hands of protagonists.
I don't think there's any one way of doing it though. For me, I usually have a pretty good idea of where my PC came from, but where they're going? How they get there? That's something that emerges from play. That, and I remind myself that even though Sarah is really into making her PC come to life and have depth, it's okay if Joe is just playing a standard ale-drinking barbarian. As long as the play styles are reasonably compatible, I make options available but don't push it. The major reward is the fun we have in game, with the exception being that I do reward inspiration for any stories the players post.
Hope that answers your question.
