I'd suggest it has something to do with coordination. When you have a small team, you can more easily arrange for that team to all pull in the same direction.

I'd suggest it has something to do with coordination. When you have a small team, you can more easily arrange for that team to all pull in the same direction. When you pass a certain threshold of employees (I'm not going to suggest 40, the number is clearly going to vary in the real world) a lot more effort is required to coordinate the work of employees. This means more middle managers, more meetings, more email traffic, more office politics as teams start to fragment, etc... All of these things can hamper productivity if not handled correctly.