In product development, discovery is the process of determining what to build.
Discovery takes different forms at every startup. Rightfully so because what it means to validate an idea can be very different in one company. For some ideas, a paper prototype is enough, for others you need to ship something in market to really test if it will work.
Being too close to either end of the spectrum is dangerous. On one end, a company may lose great ideas because of a false negative validation. On the other, every idea gets shipped and development becomes very expensive.
Apple used a prototyping process to come up with the original iPhone. Facebook ships hundreds of small a/b tests to see whether a feature works. A new lean startup can often validate an idea with a Google doc or landing page.
As you improve the discovery process, it helps to build intuition for future decisions.