Failed to generate a user instance of SQL Server due to a failure in starting the process for the user instance

User instance mode of SQL Express allows you to bundle a SQL Server database file with your (typically web) application and have it attached to the SQL Express service at runtime. This is useful for development as the entire database is a single file that can be packaged with the rest of the application source.

However, this didn't work for me with the following error:

Failed to generate a user instance of SQL Server due to a failure in starting the process for the user instance

Wow, that's not too helpful guys. The real problem: I had configured my SQL Express instance to logon as Network Service. User instance mode requires LocalSystem. This can be changed by in SQL Configuration Manager. (Double click on the offending instance and change the logon type to LocalSystem).