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Simple answer actually. Every mysql table is a file which has two more additional files (index file, data, etc). Usual wordpress installation has around 10 tables which is 30 files (depends on wordpress version).
Every time when surfer clicks something, your system has to find a table which is in a file and it takes some time. If there are a lot of files, it takes a longer time to enumerate all the files and find a table you need. So if you have thousands of files in a folder it can take several seconds to open your file.
I had a client who had 300,000 files in a folder and opening just one file for writing took around 25 seconds. So optimal limit should be around 300-350 wordpress installations in one database which is 1000 files in a folder. So you can be sure that everything works ok and it is also pretty enough for everyone.
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