When a cloud instance starts, it automatically runs a startup script. This script contains commands like updating packages, installing software such as nginx, and starting services. The execution flow begins with the instance booting, then triggering the script, running each command step-by-step, and finally the instance becomes ready with the automation applied. Variables like instance state change from booting to ready as the script progresses. Key points include understanding that the script runs without manual input, network access is needed for package installation, and failure in commands can leave the instance partially configured. The visual quiz tests understanding of the instance state at different steps and the script execution timing.