Can't you just download a Ubuntu DVD iso and boot from the iso (mount the iso as a virtual drive)
Right-Click your VM, Select settings,
Click Storage,
Click under IDE controller where it says empty.
Then click the CD icon button on the top right, select 'Choose a virtual CD/DVD disk file'
Browse to the linux ISO select it.
Then Start the VM
I tried it with a Mint Linux Live-CD ISO (mint is based on ubuntu) it started pretty quick.
EDIT:
It seems like you're not pointing The Vbox settings at a bootable ISO correctly, does it work if the ISO and the Vbox is on the PC rather than the DataTraveler
Also when you created a new vbox, did you choose ubuntu as the OS?
EDIT:
If you're using the USB drive, is it NTFS formatted? If it's only FAT32 then it could be having issues with any files over 2GB