We develop a multi-level theory of business model innovation (BMI) that explains business model dynamics within entrepreneurial SMEs, integrating the processes happening at the individual, collective and organizational levels. Existing SME level approaches portray BMIs as a firm-level phenomenon, but do not specify how they emerge and evolve over time, while micro-foundational approaches illuminate the entrepreneurs’ contributions but reduce BMI to a cognitive process at the level of individuals. Our framework integrates these contrasting approaches, conceptualizing BMI as a complex process happening at three interrelated levels (micro-, meso- and macro-), and provides a set of propositions delineating the mechanisms and conditions where entrepreneurs` cognitive models (managerial schemata) are translated into organizational changes (routine reconfiguration). Grounded in the enduring entrepreneurship literature, a set of theoretical propositions derived from this view offer a new ground for understanding how BMIs can lead to firm-level value creation and capture.