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I have a ESXi 5.5 host server where i need to build a Xubuntu Server, my bandwidth limits me from sharing the ISO over the LAN, and my host server does not have a CD/DVD drive.

so is it possible to make the VM booting off the external USB which is connected to the server and has the ISO on it?

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ESXi can do USB passthrough to the guest VM. You need to add a USB Host Controller to your VM, and then you can add client USB devices.

ESXi won't be seeing the contents of your USB stick, so your USB stick had better be in a bootable format. Be careful with this though because you don't want to reboot your host whilst a bootable USB stick is in there and find that it's got USB devices overriding the primary boot method.

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