As far as I know it started like this:
Scawen made a little physics based driving game during his lunch breaks at Lionhead (which explains why B&W was delayed so much, and why my money kept eating him). His friend Eric Bailey (whom my monkey didn't like the taste of) helped out with the 3D stuff and non-programming (or less programming). Gradually it evolved until mid 2002 (I think) when it was released as a very early demo with grand plans of a big update (S1, S2, S3, S4) released at 3 month periods.
It attracted a cult following very quickly, and as word spread so LFS matured. The original plan of 3 month updates was eventually canned as unworkable, and the system changed to three stages rather than 4. Since then it has been the natural evolution of LFS at work until the present day. From the very first public version you can feel that LFS is something special and to this day nothing has, in my opinion, got close to it's tarmac physics. RBR however is better on loose surfaces.
They are NOT in this for the money (though of course it always helps, and supports the hosting of webspace and Scawen's home improvements), but to create the worlds best online racing game. Scawen is, I gather, a bit of a purist, so some things take a little longer to perfect than the bodging of ISI based simulators.
Victor became part of the operation long before I got into LFS back in summer 2003, but his exact history with the sim currently escapes me, but he's done his fair share of the work, as has Eric. But as Scawen is the programmer of the actual sim he tends to get more of the applause, and I don't think that Eric or Vic would begrudge that.
None of the above is presented as fact, but as my interpretation of what I have read and been told over the years. Inaccuracies may be present, and the author of this post accepts no responsibility for and mental or bodily injury caused by the contents howsoever caused. Edit: There are a few too many "buts" in that post. Sorry.