Short answer? Yes, it was definitely unrealistic and may also have been bad.
Long answer? The "unrealistic" issue is that such a game would cost far more than 500k to make, and anyone involved in game development or software production could see it. Just getting the basic systems in place might have been reasonable, meaning you'd have a stick figure whose sword moved properly, and the ability to register hits from said sword. Adding in things like a movement, multi-character interactions, networked gameplay, graphics, writing, testing, redesigns, etc. would have completely blown their budget out of the water.
"Bad" would likely have become obvious as they began testing their game. These sorts of sword fighting controls have long been known to be problematic, with one big issue being that there's currently no way stop the controller from moving when the in-game weapon hits something. Your controller ends up out of sync with the sword, and you have to try and recover while your character flails around in a nonsensical way. It ends up feeling loose and unsatisfying, and people don't buy in. I didn't see anything in their pitch to overcome that major issue.
As a perfect example of what looks different from a developer perspective, the motion controls in Zelda: Twilight Princess were based on a totally different concept even though they're superficially similar. They sensed rapid movement along one of three axes using a simple inertia-sensing controller and triggered a handul of pre-animated attacks based on which axis moved and a couple other modifiers. (Such as whether you were blocking or running at the time) Clang was purporting 1:1 recreation of your movements onscreen, meaning that the exact movement you make with the controller would be reproduced, and they'd determine a hit based on how that digital sword interacted with a target. It's a far more complex task. Also Twilight Princess likely cost a minimum of $10 million to make, I would estimate somewhere closer to $30 million by the time the Wii version was released.