The first time I ever ran across this phrase in relation to fiction writing, I thought it was a bit pretentious, but I know better now. It is an incredibly accurate term, elegant in its simplicity as it describes a fascinating and difficult process facing any and every genre fiction author. The process of constructing an imagined reality, a world with its own laws or physics, causation and social order, and maintaining that creation's coherency as a backdrop for the action and development of fictional characters, is very hard work. You have to give it its own "voice" and make it feel "real". You can't cheat or scrimp on its details, and you, as a writer, have to be willing to invest the time and effort to make this constructed world resonate with readers who come to your sub-creation with THIS world as their frame of reference. You have to make the reader care about it and make it inseparable from your characters.
There is, of course, a temptation to succumb to spilling out huge blocks of dense exposition in explaining the facts & underpinnings of your faux-universe, (the "Hey, look at how clever I am!" syndrome) but, if you WORK at what you do and pay attention to the fact that your readers are on a journey of discovery as they follow the action of your characters, you can disseminate the information you need to share and not manage to bore your readers with endless action-killing, unnecessary details.
Look at it logically: you go through life as a relatively well-informed adult without actually knowing EVERYTHING that's going on, don't you? Then WHY would the characters in your story behave any differently?
Create your fictional world with the understanding that you're going to reveal only what's needed to move the characters and story along to its conclusion, but remember that everything is somehow connected.
But make sure you are true to the "rules" of the universe you've created. And make those rules have resonance to the characters, the story and what it is you're trying to say. Oh yeah, we're back to that again: your story is, ultimately, supposed to be ABOUT something. Your imagination has woven a fabric against which you can set the fable of injustice, revenge, love, honor, or sacrifice that you're ultimately crafting. The character backstories, imaginary maps and locations, fringe science or social orders that you've created are simply a backdrop for the action of your novel -- think of it as "texture".
Worldbuilding, in and of itself, does NOT a novel make. In and of itself, it's just a gimmick. Gimmicks do not make a basis for good novels.
Great fiction, regardless of genre, should aspire to be more than just a fictional romp between contesting characters in popularized, easily-digested depictions of battles between "Good" and "Evil". There are shades of gray. There are morality tales within the action. There are evolutions depicting the growth of the characters because of, or in spite of, the action putting them through their paces. There's Love and Betrayal and Honor and Duty and Hate and Greed and Madness, not portrayed in broad cartoonish strokes, but in reasonable representations of how people behave. There's a dollop of The Real amidst the swashbuckling stew cooked in the melodrama.
If you dare to build a world, it should live and breathe. The Reader should be able to feel it and taste it, be able see its beauty and its ugliness, and be able to feel it is real.
Me, I write cross-genre horror fiction, popularly classified by booksellers as "urban paranormal" these days. I write novels about mutant species of human beings, different branches from off the central human tree, in recognizable modern urban settings and I try to make their interactions with one another and with regular people make sense, follow a logical path, and I make those actions consistent. I'm attempting to give my readers a window to a world where non-supernatural vampires exist, a product of parallel evolution, and where the governments of nations have unofficially recognized their existence, agreed that genocide is not an acceptable moral option in dealing with them as a people, and entered into secret territorial treaties with them as a "shadow nation", even going so far as to ratify a provisional "Bill of Rights" covertly recognizing the vampires' "intrinsinct, undeniable, species-wide nutritional requirements", allowing them to hunt and predate, but within acceptable, minutely-defined limitations (which the villains are always breaking, or I'd have no story). To have this as a framework for the action of the characters in my books, I have to allow for the fact that there would, by necessity, be government and law enforcement oversight on the vampire community. The general public would be kept in the dark, but certain criminals and metropolitan police squads would have to be aware of the vampire presence.
Bluntly, I can't fall back on the old, shallow Hollywood trope of a bunch of fanged monsters running around arbitrarily killing people with only the intrepid hero and secondary characters knowing about it. They don't exist in a bubble. By setting the stories in a metropolitan sprawl, there's no way I can "simplify" or "streamline" and just have Little Johnny Air-Guitar and his loyal, but goofy friends down the block be the only ones noticing the proliferation of exsanguinated deadfolks with strange neck wounds. And no multiple centuries-old vampire, with decade-upon-decade of experience hunting & killing human beings, with five (or more) times normal human physical strength and with limited extrasensory abilities, is going to be seriously threatened by a well-meaning, XBox-playing, slacker teenager who "learns" about how to oppose them though some moldy old library books. How many times have you seen/read that tripe? Has it EVER really made any sense? And you WONDER why critical literary types don't take horror genre-writing seriously?
Right. Sorry, but that dog don't hunt. Not in my world.
And that's the key phrase: "my world". Little Johnny Air-Guitar and his loyal, but goofy friends down the block are a cliche and a conceit that do not fit. Not here. Not in the environment that I have created and developed in which I place my characters and the action. Not this false "Reality" I have constructed, with its defined structure and rules and internal logic. It may be dark, it may be macabre, it may be twisted, it may not leave you "feeling good", but I, as the author, have to act as though it were totally real. And I have to make YOU, the reader, believe it.
More, I have to make you CARE about it. That brings us back to texture and resonance. Everything's connected, dontcha know.
Worldbuilding. It's fun, but wear a cup -- it can get a little rough. And that's how we like it.