A setup is a set of actions done by the player to put the opponent in a specific situation that allows the player to perform some other actions that are usually hard to perform in a neutral situation.
Setups can force the opponent to be in a specific position (e.g. in the corner, knocked down, jumping, air reset at a certain distance) or can limit their available options through the use of certain tools (e.g. projectiles). They can be used to prepare for combos, overheads, command grabs or in general any slow attack with advantageous properties that require a set spacing and timing to be landed.
Setups differ from combos or mix-ups in that the set of actions performed doesn't immediately lead to an outcome. A player doing a setup may often look as if he's doing random or useless things like whiffing attacks or throwing fireballs where they won't hit the opponent, while in reality he's setting up another situation that will follow. In that sense, a setup is often a kind of mind game, even if it isn't necessarily such.