You need to meet the technical requirements for VM1.

Set-VMProcessor -VMName VM1 -ExposeVirtualizationExtensions $true

The requirement is to run virtual machines on VM1 itself, which means enabling nested virtualization so that VM1 (a guest VM hosted on Server2) can install Hyper-V and host its own virtual machines. Nested virtualization on Hyper-V requires the parent VM ' s virtual processor to expose the host ' s hardware virtualization extensions (Intel VT-x or AMD-V) through to the guest. This is done with the Set-VMProcessor cmdlet using the -ExposeVirtualizationExtensions parameter set to $true, run against VM1 from the Hyper-V host (Server2): Set-VMProcessor -VMName VM1 -ExposeVirtualizationExtensions $true. VM1 must be turned off before this setting can be applied, and after it is applied, VM1 needs the Hyper-V role installed inside the guest before it can run its own VMs. Set-VM, Set-VMBios, Set-VMHost, and Set-VMFirmware do not control virtualization extension exposure: Set-VM manages general VM configuration such as memory and name, Set-VMHost configures host-wide settings, and Set-VMFirmware/Set-VMBios control boot and firmware settings for generation 2 and generation 1 VMs respectively. Only Set-VMProcessor with -ExposeVirtualizationExtensions satisfies the stated requirement, making it the correct first step.