Last tested: Sep 30, 2020
This is happening because you likely have SAML/Google OAuth/LDAP/OIDC enabled for your instance. That means Looker expects all users to authenticate through SAML.
To get around this, you'll need to enable the alternate login option (Help Center article) and then add the
login_special_email permission to the role of the new user. Once those changes are made, the activation email will take users to a new account set up page which prompts them to add their first name, last name, and a password.