When Laravel starts, it looks for a file named .env in the project root. This file contains lines like APP_NAME=MyApp which set environment variables. Laravel reads each line, splits it into a key and a value, and stores these in its configuration. For example, APP_DEBUG=true tells Laravel to show detailed error messages. If a variable is missing, Laravel may use a default or cause an error. You can have different .env files for different environments like local or production. This lets you change settings without changing code. The process ends when Laravel reaches the end of the .env file, having loaded all variables for the app to use.