arangod will not create any folder for you, you have to give it an existing folder on your system.
/tmp/fancy_db
is just a suggestion you can use any folder at any location on your machine. However to create a folder in /tmp on a unix system open a terminal and enter:
bash> mkdir /tmp/fancy_db
On a windows system (as far as i know) \tmp is not available, you can use
C:\tmp\fancy_db
instead (create it with Explorer)