It is possible to keep this model working at a scale with a lot more employees. That being said it requires not only the right culture within the company, but the right people. Keep only the creme of the crop employees; stop 'fiscalizing' sick days, time sheets, and clocking hours; get the developers to get together at the start of an iteration (say every two weeks for example) and together come to a definition of priorities and tasks; measure results, not time in front of a computer. You as a business owner have - of course - the last word on any issue or priority; however empowering your employees, while keeping a friendly, social, and liberal company culture, will most probably have a positive effect on your workforce's drive and productivity. Hell everyone wants to the see the company grow when you really feel a part of it, as opposed to just another employee.
As a counterpoint though, I feel this approach only works with IT, Development and Design Departments. Lot's of other departments (Sales, Marketing, Customer Service, Implementation) require a certain structure and hierarchy to function correctly. In my experience, the more specialized the skill set, the more are liberty and culture important to further the drive of the team/teams.