All four teams in Group D are domestic champions, and while Watzke admitted the group will be tough, he also challenged Dortmund's players to become "heroes".
"In such a group, heroes are born," said Watzke. "This is an incredibly difficult but also incredibly attractive group with three Champions League winners and the English champions.
"We want to progress. This is a crazy group. We could not have drawn any teams harder than Madrid and City.
"Of course it's great to play at the Bernabeu or on English soil, but honestly I would have hoped for an easier draw."
The Champions League group stages begin on September 18.