I have other dismiss buttons in other VCs. I'd like those dismiss buttons to also exit the app and go back to the watch face just like the apns payload dismiss button does.
1 Is this possible
2.Is this bad design? Should it go back to the initial VC?
A press of the Digital Crown is the accepted way to exit the app and return to the watch face.
If your app exited when the user pressed an interface controller button, the user would think that the app crashed. For that reason alone, it's a bad design and would likely generate poor ratings.
If I'm using a dismiss button what's the difference with exiting the app like the notification dismiss button does?
You dismiss a notification. You don't dismiss an app, because apps don't have a dismiss button. That's what the (Home button or) Digital Crown is for.
But if you don't think it's a bad design, you should submit it to Apple and see if they approve it.