Hmm, I had to restart two or three times before I could win the first mission with 4 men. What happened to me (fairly often), was that a unit would get hit, panic, the actually attempt to shoot one of his squadmates. For me that intentional targetting of your own buddies was a terrible design decision
So anyway, the paniced guy would kill the 2nd guy, and in one go you've lost 50% of your team. 90% of the time at least one of the remaining two would panic in response to either the guy dying or the first guy panicing (sympathetic panicing?)
I remember a couple missions where I lost an entire squad in a chain reaction, starting with a guy panicing from his wounds, friendly fire, the 3rd guy panicing and more friendly fire. I never got control of the two panicing units who ran headlong into the enemy and died.
And all of that was triggered by a single guy dipping below 100% health. Seriously, they would panic at the slightest thing I found. This was "classic" difficulty.
So it's not just the 4-squad limit. It's:
1 The 4 squad limit
2 The low requirements for panic (losing a single bar of health will do it)
3 The intentional programmed friendly fire (why?!?!?!)
4 The lack of free aim
5 The absence/limit of non RNG options (explosives, incendiary, proximity mines)