DAO stands for Decentralised Autonomous Organisation. It is a company without human governance, there are no directors or leaders who are in charge. Like DAPPS, DAOs are also based on smart contracts, the value and the rules of the company are coded in a smart contract which means they utilise the Ethereum blockchain.
DAOs are created to increase transparency, efficiency and remove human errors. DAOs raise fund by selling their own tokens. Anyone can be a DAO token holder by exchanging their Ethers (or Bitcoins) for a DAO token. The more tokens you have in a DAO the more voting power you have. DAO token holders vote to decide which projects to fund and if the project proves to be profitable, the profit goes back to the DAO thus increasing the value of its tokens.