On the Users tab I'm trying to add a new user but the prompt says "Select user from directory" and when typing an email address to invite it just says "No identities found". This is a newly created account with default settings not linked to any azure subscription.
The settings show Allow External Guest Access which I assume should allow any microsoft account to be invited.
According to the screenshot you provided, your VSTS account is backed by an Azure Active Directory which requires that all users are directory members before they can get access to your Team Services account. So you need to add the user to your AAD first.
"External guest access" is used for external users who are added as guests through Office 365 or added using B2B collaboration by your Azure AD administrator.
Q: Can I control access to my Team Services account for external users in the connected directory?
A: Yes, but only for external users who are added as guests through Office 365 or added using B2B collaboration by your Azure AD administrator. These external users are managed outside the connected directory. To learn more, contact your Azure AD administrator. The setting below doesn't affect users who are added directly to your organization's directory.
Refer to this link for more information: Team Services: Access with Azure Active Directory (Azure AD).
