Prior findings are inconclusive concerning the innovation output of family and non-family SMEs. The study at hand takes one step back and examines the drivers of innovation output. Applying a contextualized approach, we use data of 1.870 SMEs located in Germany, arguing that the main characteristic of family SMEs is the unity of ownership and leadership. These specific elements affect both the drivers and the output of innovation leading to a more detailed understanding of family firm innovation. Our results indicate that a long-term perspective positively affects innovation output in small family firms. We also show that family firms are better able to preserve the knowledge of the workforce through lower fluctuation rates which leads to higher levels of innovation output. Finally, the succeeding generations of family firm leaders seem to be more risk averse than the founder generation. As a result, the innovation output continuously decreases from generation to generation.