First, you could upgrade by just using WiX Toolset 3.7 and running wixcop on your WiX files to upgrade them.
If you want to use the new WiX bootstrapper...
You need both project types. A "Setup" project creates an .msi file. A "Bootstrapper" project creates an .exe file.
Remove the Visual Studio Bootstrapper items and GenerateBootstrapper tasks from your setup project. Create corresponding ExePackage or PackageGroupRef elements in your bootstrapper's Chain. A PackageGroup roughly corresponds to a Visual Studio Bootstrapper package but the "syntax" is different. To recreate a Visual Studio Bootstrapper package consult the files under C:\Program Files (x86)\Microsoft Visual Studio 8\SDK\v2.0\Bootstrapper\Packages
or equivalent.
For the Microsoft .NET framework, the WixNetfxExtension extension defines package groups that you can just reference.