Good question!
ICO or Initial Coin Offering is similar to Initial Public Offering or IPO for short.
The same thing happens - There is a company or group of people who have a solution for a problem, service or a product. They are looking for a way to raise funds.
And ICO project is something like a Kickstarter. It actually is a Crowdfunding project. During the ICO, the company creates their own, unique tokens that might be used for their service/product. People then pay in Ethereum or Bitcoin (Usually using those two cryptocurrencies) and get Tokens of that company in return. After the Token sale or ICO is finished, the tokens become tradeable after some time, meaning you can trade them on a cryptocurrency exchange for Ethereum, Bitcoin or any other Alternative Cryptocurrency coin. The team will use part of the funds raised from the ICO to develop or upgrade their product/service.