It could be a firewall setting on the sql server. Can you connect using SSMS from another machine in your network? Are you using the default port? If so is there a firewall rule allowing traffic on 1433?
If connection is not the problem then it looks like a user right issue. The account running TFS and if it is different the account installing TFS will need a proper login to SQL.
https://blogs.msdn.microsoft.com/bharry/2010/08/20/database-permissions-required-to-configure-tfs/
Look at your screenshot: You only gave it a SQL instance name ( MSSQLSERVER
). You have to provide a database server name as well. How is it going to know what server to connect to otherwise?
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