We are using dynatrace 6.5. Following the sizing guide, our server should be in Large scale. My question is whether we can setup our external collector server(with multiple instances) on a virtual machine?
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The short answer is that it can indeed be done. The longer answer is that it will require the same dedicated resources as a physical machine. These collectors also need to be very close latency wise to the applications that they are receiving data from as they will not function correctly in a high latency environment. This means they are usually deployed in the same physical location of the apps.
You can read more about Virtulization Requirements and Best Practices HERE