Following his interview with freelance writer Matt Fullerton, focusing on a report titled “Import Replacement: Local Prosperity for Rural Atlantic Canada,” which was released by the Centre for Local Prosperity early in 2018, Robert Cervelli, the group’s executive director, agreed to a follow-up interview with Rural Delivery, tracing his career trajectory. What follows is an edited transcript of that interview, which was conducted in September 2018:
Could I start by asking a bit more about your science background, because that’s kind of where you started out - the first part of your career was in that. Can you tell me about how you started into that sector, in the life sciences?
Yes, I have an undergraduate degree in forestry from Purdue University in Indiana .... I have a master’s in botany from University of Wisconsin, and I’ve been involved in tech aspects of horticulture for quite a few years in my early career – meaning micro-propagation, which is a fancy term for growing plants in test tubes. A lot of different industries grow plants that way to propagate them, because it’s disease-free. So, a lot of the potatoes start in test tubes – strawberries, a whole lot of different things. And difficult-to-propagate things are done that way, like orchids and rhododendrons and so on. So that’s how I started my career, and then I moved to Nova Scotia in 1987.
And was it academic work, or a business startup that brought you here?
It was a business startup. It was a large micro-propagation lab located outside of Canning, called Nova Biotechnology. And it’s a long story there, and quite a dramatic learning curve, and my first scar tissue, you could say. It got involved in a lawsuit with Canada Pacific – CP – which was the initial investor in it, and the whole thing went out of business 18 weeks after we moved from Wisconsin to Nova Scotia.
At that point I put my lab coat down, picked up a business jacket, and started writing business plans. And I’ve been involved in probably eight different bio-tech startups over the past 20 – actually, close to 30 years.
And that involves partnering with science people who have an idea that can be commercialized, and trying to bring that forward?
Yes. All kinds of different contexts. I was involved in Canada’s first forest bio-technology company, called Silvagen, which was basically looking at propagating elite strains of trees – both ornamental, like Colorado blue spruce, for example, and for the forest industry.
Is this somatic embryogenesis technology, and that kind of stuff?
I’ve followed Raj Lada’s work a little bit, with the Christmas trees.
Yes, and I did a bit of a stint with the Christmas tree growers, out of New Germany. Matt Wright would remember me. That’s an example of where they would benefit from selected clones of Christmas trees – tight branching, disease resistance, that sort of thing.
So you did a few of these, and in each case, as you move from one to the next, how does that happen? Is the idea that they will most likely be acquired by a larger company once you reach a certain stage of commercialization?
Yes, in any kind of startup, especially in the tech world, the goal is usually one of two “exits,” as they say in the investment world. Either it gets acquired, or it goes public. So one of them that I was involved with is Immunovaccine Technologies, which spun out of some very interesting contraceptive work done for wildlife, out of Dalhousie way back in the ’90s, and that has since gone public and is doing fairly well. It’s moved over from wildlife contraception to human therapeutic vaccines, particularly for cancers, and so on.
And your involvement in that is over, or do you still have a hand in that?
Well, I was one of the founding shareholders and one of the early principals to help build it. So, I think everyone involved in the tech world would agree, some work out, some don’t. Silvagen ultimately was sold and moved to British Columbia, where there’s a more vibrant industry. So it’s kind of case-by-case.
I was involved in a number of small startups out of Dalhousie, out of the medical school – some initial venture funding, but the business model just didn’t prove itself out, largely based on the state of the technology and the potential to try to generate products out of it.
So, as I said, the reason I inquired about this – the reason your name was familiar to some people – was because of the Origin BioMed story that was in the media. Can you tell me a bit about how that shook out? I know it’s a long and complicated story, but how do you look back on it?
It was venture-backed. It started out as angel investors. You know about angels and venture caps and all that sort of thing, in terms of financing startups?
I wouldn’t say I’m really well-versed on it, but I know that that’s the term used for people who will invest in a new and potentially risky company that has an idea that holds promise.
Yeah, well, it was bootstrapped at the beginning, and a pretty classic sequence of financing. It starts out family and friends putting in a little bit to move it along. Early product revenues – these were all consumer health products, based on good science behind mechanical actors. One way or another, I’ve always been involved in commercializing actives that come from plants – active compounds. So we had a suite of products based on a number of different things – some of the aromatic oils and their effects on nerve pain; the actives in green tea called catechins; a nice partnership with the largest tea company in Japan, Mitsui Norin; a number of other things, one of which came out of the Dalhousie Dental School, for anti-herpes, both cold sores and genital herpes.
So, a nice suite of products. We moved from family-and-friends investors into angel investors – these are private individuals, usually high-net-worth, willing to put some money into startups. And then eventually moved into venture capital financing. It was led by a private venture capital company out of Alberta, and venture caps like to play together, so at that point – I think right at the beginning – we had NSBI (Nova Scotia Business Inc.) involved. They don’t want to lead, so to speak; they usually wait for a private sector VC to lead, which is what happened. So we had several rounds of financing, moving the whole suite of products into health-food stores and drugstores, initially in Canada and eventually moving into the U.S.
So we were well financed by the venture capitalists – several rounds of financing – and the goal was to build top-line revenue. And it quickly came down to our lead product, called Neuragen, which is a topical oil for nerve pain. The largest indications are for shingles, which is nicknamed adult chickenpox; and diabetic peripheral neuropathy, where diabetics get pins-and-needles pain in their toes and fingertips – that’s nerve damage. So those are what it was sold for. Eventually we got into over 40,000 drug stores in North America, so all the big chains, certainly in Canada – Shoppers, Lawton’s, London Drugs out west, all of those. But then we worked our way into the big gorillas down in the U.S. – CVS, Walmart, Walgreens – and early on, it became apparent that it’s risky business – a small, effectively single-product company playing into the big U.S. chains – because they’re big, and they have an attitude, and they’ll grind you.
But our goal was to pump top-line revenue, so we were really pushing hard on marketing. We effectively established a brand-new brand in the U.S consumer-health marketplace, which is not easy to do.
Sorry, “top-line revenue,” does that just mean sales?
Yes. So we were pushing hard on the top-line revenue. I think at one point we were pushing $8 million in revenue annually on that product. And then – which is also typical of venture caps – that is usually a good time to try to sell the company to a bigger player in the industry. So we orchestrated a whole song and dance; we had a merchant bank. Merchant banks are brought in on a commission basis to basically buy or sell companies. So, a lot of trips to New York, talking and pitching to larger consumer health product companies. We did not yet show a profit, meaning the bottom line, because we were pushing top-line revenue.
And the product was being manufactured in Nova Scotia throughout this period?
For the U.S. it was being manufactured in the U.S., with a contract manufacturer. And at the end of the day we got a few offers, but they weren’t high enough for the venture caps. When you’re in the venture capital business, it’s all about what they call the “multiple” – how great is your return on investment. So the legendary return that they all hope for is what they call the “10-banger,” where they’re going to get 10 times the amount they invested. But that’s very rare. There’s all the legends of people who invested in Google and Facebook and all that stuff, so that’s kind of what everybody dreams about if you’re a venture capitalist. In this case, the multiple was not enough for what they and hoped for, and it was at this point, because we were still not showing a profit, we were still needing additional investment to keep pushing the revenue side, so we were not able to get enough of a return to sell the company, the board and I agreed – I was burned out – and I was going to leave at that point, or step back as CEO, let’s put it that way.
This would have been 2011?
Yeah, and they brought in another guy. We needed additional investment, because we had not focused on making it profitable, we had focused on pushing the amount of revenue at the top. So that’s when we brought in another guy. He basically stripped down the whole product line, just to that one product, to try to focus on that. And it was at the same time that we ran into trouble with a coupon fraud that happened with Walgreens. It’s a bit of a long story, in terms of how the different types of coupon programs that the big chains do. They like to blow through a lot of inventory every month or so with a price reduction at the shelf. Usually it will say one third off, and they want to just move a lot of inventory through. In this case, it was a third off at the shelf, a third off if you had their coupon and used their loyalty card at the cash register. But there was a fraud that started to happen that we picked up on afterwards, where people were just scanning these coupons for cash or for points on their card. And basically Walgreens took us to task that we owed them the money for the whole fraud, which was about a half a million dollars. So that, combined with the fact that we needed more investment, that’s basically where the company started to run into financing troubles, and eventually it went out of business.
So, what the public in Nova Scotia knows about it is that NSBI was left on the hook for some of that.
Yeah, they put in about $6 million, six and a half, I don’t remember the exact number, to be honest with you, which is about the same as the other venture capital firm. There were other investors that had put in, some high-net-worth people that had also lost their investment. And from NSBI’s point of view, it’s classic. In the venture capital world, there’s a rule of thumb: you invest in 10 companies; two of them die and you lose your investment; two of them are the big hit, you know, the 10-banger kind of thing, or maybe less than that but still you get a return; and the rest of them are what they call “the walking dead,” meaning that they’re alive, they’re viable, but they’re never going to show a big return.
So they’re neutral as far as investment?
Yeah, neutral. It’s a wash, in terms of their investment. So that’s kind of the rule of thumb in the venture capital world. It’s an interesting business to be in, and that’s what NSBI – I mean, it wasn’t just Origin BioMed; they were involved in a whole lot of other things; some worked out, some didn’t. And that’s kind of the way it shakes out.
This is kind of a tangent, but a product like Neuragen, does it work partly on homeopathic principles?
It’s registered in the U.S. as a homeopathic product – in the U.S., so that it’s classified as an over-the-counter drug. The regulatory frameworks are different in the U.S. and Canada. In Canada we have a Natural Health Products designation. That’s how it was classified here, the active being an essential oil – an enormous depth of science behind it, clinical trials, the whole thing, right down to what’s called electro-physiology, where you have single neurons, and you can look at the responses across how a single neuron fires, the electrical potential across the membrane in response to different compounds. So, a beautiful depth of science behind the whole thing, in terms of how it worked. Fresh patent, intellectual property protection around it, the whole thing.
This is something I don’t know much about, but if you’ve got the clinical trials, why can’t it just become a prescription pharmaceutical, and go down that road?
You could. The bar goes up enormously, particularly with the FDA (U.S. Food and Drug Administration), and the bar creeps upwards every year with the FDA. So today, to get any new drug at all approved by the FDA, for anything, is a minimum of probably $250 million, and probably eight years. And it keeps creeping upwards. And that’s a minimum. Most drugs, you’re in the billion-dollar range by the time you do all the clinical trials, and probably 10 to 12 years. There’s not a heck of a lot of new drugs getting approved by the FDA. That’s a whole other story.
But this was the channel that made sense for your product, anyways.
Yeah, that’s why we stayed as an over-the-counter drug in the U.S. and a natural health product in Canada.
So that happened, and you no longer had that role with Origin BioMed?
That’s right, and it slowly wound down, and I think it finally went out of business about three, maybe four years after I stepped out in an active role.
Looking back at it – because NSBI is kind of an endless debate in Nova Scotia – would you say that it is meant to function like a venture capital organization, and that some losses like that are par for the course, and that’s just how it works?
I would have to say yes. You know, in a one-word answer. That seems, from everything I saw, that was their intent, to function as a venture capital investor in Nova Scotia companies. But most of these government-led investments, they don’t want to take the lead; they wait for industry to take the lead, which is what they did in this case, and probably every other case.
But it doesn’t work like a venture capital unless they get the home runs, right?
Exactly, and I haven’t kept track of their scoreboard. I think they may have gotten a few home runs along the way. But when you’re in that business, it’s just – I don’t want to say “the luck of the draw,” but it’s how the statistics play out.
Okay, so in that period following 2011, is that when you began making a transition closer to what you’re doing now?
Well, I’ve been involved in community economics for 32, maybe 35 years, at some level or another. It always struck me as the root of most of humanity’s issues right now – this bizarre artificial structure we call “the economy” that effectively runs the planet. It’s an artificial structure; we made it up. And most artificial structures, they have an evolution. So it worked more or less well in the beginning, and now we’re sort of seeing end-stage of how it evolves.
So there’s an exacerbation of what the side-effects are, when you’re in an end-stage model. And believe me, there’s a heck of a lot of people of all shapes and stripes around the world trying to figure out what does the next model look like. Because it’s pretty clear to everybody, even status quo, the existing model is not really functioning well anymore. It’s kind of played itself out, because it’s based on limitless resources, the ability to continue to grow, which worked well when you had those things.
So anyway, I’ve been fascinated and involved in that kind of thing for a long time, so this past four or five or six years has been an opportunity to shift and spend much more of my time working directly in this area, with a devotion to helping communities in Atlantic Canada become more economically resilient, because we’ve kind of quietly surrendered our local economies to outside forces.
And those conversations, and your thinking on that, led to actually establishing the Centre formally – at what point?
Yeah, I’m co-founder of the Centre for Local Prosperity – it’s five years old – co-founded with Gregory Heming, who’s a councillor out of Annapolis Royal. We both decided that this is what we really wanted to do. It’s actually kind of a funny story that I could tell you. We met in the winter, kindred spirits, really aligned. We decided that this region needed messaging around new economic models – kind of the Schumacher Small is Beautiful book from the ’70s, Jane Jacobs out of Toronto, Wendell Berry, all of those people – that kind of messaging had never been brought forth in a really clear way to Atlantic Canada. So we said, “Well, we need to do a big conference and bring in a lot of speakers” – highlight the best case of what’s going on in the region along these lines, etc.
So we went about planning this conference, and were well into it – had the website up, the whole thing – and people started asking, “Who’s putting on the conference?” And you can’t very well say, “It’s two guys and a cup of coffee,” because that doesn’t have the validity that it needs. So we said, “Holy smokes, we better create an organization,” which we did. And, you know, you can register a non-profit pretty easily. You put your board of directors together, you get your bylaws in place, and boom-boom-boom, off you go. So we created the Centre for Local Prosperity as the sponsor, the organizer for this conference.
It was an enormously successful conference, about four and a half years ago now – 45 speakers, all segments of the economy represented, and so on. So basically that’s how the Centre got started. We’ve since done a second conference, in Miramichi, about two years ago now. In January we rolled out a large study on import replacement, and we’re now in the process of rolling up our sleeves and helping a number of different communities on how they can focus in on what’s called “local procurement” by public-sector anchor institutions. We give a lot of talks, and the slide we always use is the image of a leaky bucket, and we say, “Here’s your economy,” and people all get it right away. So you could say, with the Centre for Local Prosperity our main job is to go around and plug leaks.
All of those ideas sound good to me, and in keeping with a lot of the principles and ideas that we’re trying to put out there in the magazine. My main question for you is – can you understand how some people would see a disconnect between your previous career, which involved high finance and being really immersed in the economic system that you are now saying is very flawed, and presenting ideas that seem antithetical to that?
No, there’s actually a close connection, because I very deeply understand the business startup world and what is needed, particularly when you’ve got limited resources but a lot of spunk and creativity – and how do you build that business sector in small communities.
But it still hinges on large capital, doesn’t it?
No. In the case of Origin BioMed, it eventually brought in large capital because it was a national-level play, a North-American-level play, meaning that we were pushing into large markets in the U.S. and across Canada, which is what venture caps want to do. On the other hand, you’ve got incredible business startup stories, locally embedded businesses, providing great goods and services into their community, into their surrounding region – very much needed, for those economies. And how do they do that? I really understand that intuitively, experientially. That’s the value of my scar tissue, so to speak, to bring to all of that. And that’s a very important part – you know, the provincial governments across Canada, everybody else is trying to push entrepreneurism. I’ve come out of that school, so to speak, having been involved in some six, seven, eight different startups. So I’m also mentoring people, as we speak – had a great two-hour conversation with somebody just yesterday.
But you can understand why a cynical person would look back at the BioMed story and say, “That looked like kind of a house of cards, and now you are preaching a form of economic development.” Some people would see a disconnect. Can you see what I’m talking about?
I can see what you’re talking about, and you may find one or two or three cynical people. You might get a letter to the editor, maybe. It’s been such a long time ago, and there are so few people that even remember or even had paid attention to that at the time, that to be honest with you, I would be very impressed if you got any feedback along those lines.
You may be right. I just wouldn’t want it to look as if we were ignorant of the larger context. The other part of this – the Centre is a non-profit organization, but it’s not a charitable group, right?
Let me say not yet.
You’d like to go that way?
We would. To become charitable, Canada Revenue likes to see first a track record of several years, in terms of what do you do and how do you spend your money, and all of that. And we know some very good people, lawyers, that specifically focus on setting up charities, so we may go that route at some point.
And you’re guided by a board, right?
Yes, and we’re building the board. We’ve just added three new people, which is fantastic. So we have some really deep strength on the board. We have advisors locally and internationally.
Do your directors get something, or are they volunteers?
As a non-profit, they all have to be volunteers. Non-profits have unpaid boards.
But you get a salary as executive director?
I wouldn’t call it a salary. I get paid when there’s funding available.
Okay, so would you say that’s less than a living wage?
Yes. But as I said, it’s important work that needs to be done. And it’s not just myself, but a number of other people involved in the organization – very dedicated to what we’re trying to do.
And there aren’t other staff at this point, are there?
There are, and they’re also paid as funding is available. We have a filmmaker, event manager, we have a research assistant, there’s another gentleman who was originally president but he stepped off the board in order to take pay to help with these local procurement programs.
Okay, well, we’ll certainly be following your next steps, and your statements on the next climate-change gathering.
We’re pushing hard on that one. And I also run a mini-farm, so I’ve got my intern here ready to roll up her sleeves and get going.
There in St. Margarets Bay?
Yeah, we run a two-acre micro-farm, so that also makes a busy time of year. The harvests are coming in.
You have greenhouses?
Four of them. I mean, they’re small, but we’re going to be taking tomato vines down today, and the last of the basil goes out of one greenhouse, and we’re planting winter spinach. And we had good frost, gotta get the squash out of the field, etc. All the good rural stuff that you guys write about.