I believe the "LAN" dropdown entry you are selecting just configures the amount of data the server should send to clients; it is probably still trying to establish an online server. I haven't experimented with hosting much myself yet, but it's possible what you want might be easier to achieve with a dedicated server.
As far as getting steam to work, the most reliable method is just to log in in online mode, then manually switch to offline mode, then leave it that way.
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