The Dresden and Genode folks do it a bit different: just virtaulize the OS as a user-mode application. Then, some add ability to reuse device drivers across VM's to get the drivers specific OS's (esp Linux) support. From there, you can slowly pull code out as standalone or native applications as you described. There's usually middleware (eg Camkes) that lets the standalone code talk to code inside the VM. I'll give Genode as an example of mixing native and VM code.

https://genode.org/documentation/general-overview/index