Azure Lab Services provides the ability to create a template machines with nested Hyper-V virtual machines. See Enable nested virtualization on a template virtual machine in Azure Lab Services docum...
I have been working very hard to build a proper lab of nested VMs using Azure Lab Services, but the 128GB hard disk is just incredibly limiting. I have used a lot of tricks not discussed in this blog post to cut down on the size, so I truly wonder how people really do it without running out of disk space. The truly essential part was to disable all checkpoints (even though they are useful, they're a luxury we cannot afford here) and I created sysprepped images + used Hyper-V differencing disks. Without the differencing disks, there is no way I would have been able to create 5 VMs in the large instance (8 cores, 32GB RAM, nested virtualization). It all works well *except* for the suffocating storage space. It's a shame because this really is the only problem to which I cannot find a good solution, I like everything else about the product.
I'd be more than happy to have a discussion with someone from the Azure Lab Services team, I'd like to get the word out about this wonderful product that I didn't know existed until recently. I really wish I could just pay extra for VM instances that have a decent storage space included.