This seems to happen because of Steam’s Big Picture controller system eating your inputs.
By default, SpaceWar (appid 480) has no controller configuration set, so you have to configurate it on your own.
The way I fixed this:
- Launch your standalone game with steam subsystem on
- Open the Steam overlay
- In the top right corner, click Controller Configuration
- Click “Browse Configs” on the bottom of the Steam Controller Configurator
- Choose Templates → Gamepad
- Apply Configuration
You only have to do this once from what I can tell.