AI Agents Struggle Without Institutional Memory

By Kevin Novak, Managing Partner & Founder at Rackhouse Venture Capital.

AI agents are rapidly becoming a focal point for 2025, with advancements in reasoning and task automation transforming them from experimental tools into essential business components. However, a critical bottleneck has emerged: the lack of institutional memory. Without accumulated context, AI agents operate like new hires on their first day, leading to predictable and costly mistakes.

The ‘First Day’ Problem

Even with strong reasoning capabilities, AI agents start each task with zero organizational knowledge. Teams either overload system prompts with context—consuming valuable tokens—or rely on the model’s pretraining, which often misses critical nuances. For example, an agent might execute code changes flawlessly but ignore company-specific protocols like coding styles or release freezes.

This issue extends to consumer-facing workflows. Personal decision-making patterns, such as travel preferences, remain invisible to agents, resulting in technically correct but operationally misaligned choices.

Tribal Knowledge and Organizational Memory

Tribal knowledge—undocumented decisions and practices—poses a significant challenge. Institutional memory resides in people, not documentation, and disappears when employees leave. While some organizations attempt to document processes, this knowledge often becomes outdated quickly, leaving agents unable to navigate edge cases and exceptions.

Real-World Consequences

The risks are already apparent. For instance, engineering teams often avoid touching legacy systems like "Jimmy’s pipeline" due to past failures—a nuance AI agents miss, leading to avoidable outages. Similar issues arise in legal, procurement, and customer success workflows, where agents lack context on contractual clauses, vendor selection patterns, or VIP account treatments.

Coaching the Next Generation of Agents

The next wave of AI progress hinges on better context handling, not just improved reasoning. Current solutions, like prompt engineering, fall short as tasks scale. Emerging tools, such as those enabling agents to store and retrieve information, offer promise but remain immature. Protocols like Model Context Protocol (MCP) could provide a foundation for modular context delivery, but the ecosystem for memory infrastructure is still underdeveloped.

Final Thoughts

The bottleneck for AI agents is no longer reasoning—it’s context. Companies that effectively capture tribal knowledge and integrate it into agent workflows will gain a lasting advantage. Lightweight efforts to document institutional memory can prevent missteps, while scalable systems for context delivery will unlock greater value than reasoning improvements alone.