[java] What is a classpath and how do I set it?

The classpath in this context is exactly what it is in the general context: anywhere the VM knows it can find classes to be loaded, and resources as well (such as output.vm in your case).

I'd understand Velocity expects to find a file named output.vm anywhere in "no package". This can be a JAR, regular folder, ... The root of any of the locations in the application's classpath.