The protected mode drivers are already loaded in this scenario. The VMM and all of the VxDs are already up and running. All that's really happening here is the first VM (the "systemm VM") is running the DOS+Windows 95 kernel/user/gdi/system/network/display/keyboard and applications, and a second VM is running the DOS+Windows 3.1 kernel/user/gdi/system/network/display/keyboard and applications.

The former's VMM and VxDs were largely a superset of the latter's. The only real trick is that there was a secret handshake between the DOS program WIN and the Windows KRNL386 program that has to be satisfied by whatever tries to start it in that second VM, otherwise KRNL386 just exits immediately. One cannot use WIN to start KRNL386 in the second VM. WIN does too much other than running KRNL386. It has to be something else that does the secret handshake and only tries to run KRNL386.