Allen is hoping his new company – called Stratolaunch Systems – will launch unmanned rockets from a flying carrier plane to ferry government and commercial payloads into space and back, and eventually evolve to human space missions.
The initiative comes only months after the United States retired the Space Shuttle program after 30 years, opening the door to private enterprise to supply space vehicles.
Allen's rocket will be launched from a massive carrier aircraft powered by six jumbo jet engines, to be constructed by Scaled Composites, a unit of defense contractor Northrop Grumman Corp. The rocket itself will be made by private space company SpaceX, founded by Elon Musk, the billionaire co-founder of PayPal.
The first test flight is targeted within five years.
"I have long dreamed about taking the next big step in private space flight," said Allen in a statement. "To offer a flexible, orbital space delivery system."
Allen - listed by Forbes magazine as the world's 57th richest person, with a fortune of $13.2 billion - is the latest in a line of tech billionaires with interests in the privatization of space travel.
His space ambitions put him alongside Musk and Amazon.com founder Jeff Bezos, whose Blue Origin aims to put people into space at an affordable price, rather than the millions of dollars it has cost up to now. Richard Branson's Virgin Galactic is also looking to transport passengers into sub-orbital space.
Allen, who made up the name Microsoft, co-founded what became the world's biggest software company with Bill Gates in 1975.
Lacking Gates' single-minded drive for business success, he left Microsoft in 1983, as he dealt with a first battle with cancer. He recently survived a second course of treatment for a different type of cancer, but says he is healthy now.
He owns the Seattle Seahawks professional football team, the
Trail Blazers basketball team in Portland, and his investment firm developed much of the South Lake Union neighborhood which is central to Seattle's re-emergence as a technology center.
He is a generous donor to the University of Washington and is funding new research into the brain.
For leisure pursuits, he owns one of the world's largest yachts and built the Experience Music Project and Science Fiction Museum in Seattle. Allen's memoir, titled "Idea Man", was published earlier this year.
(Editing by Gunna Dickson)