Lifelong space enthusiast Allen is hoping to launch unmanned rockets from a massive flying carrier plane to put government and commercial satellites into space 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 what will be the world's biggest plane, a massive carrier aircraft powered by six jumbo jet engines, to be constructed by Scaled Composites, a unit of defense contractor Northrop Grumman Corp.
Its wingspan will be about 385 feet, bigger than a football field and 70 percent longer than the wings of a Boeing 747.
The rocket itself will be made by private space company SpaceX, created by Elon Musk, the billionaire co-founder of PayPal. The rocket and carrier will be integrated by aviation and missile specialists Dynetics.
The first test flight is targeted for 2015 with the first commercial flight the year after.
"I have long dreamed about taking the next big step in private space flight," said Allen. "To offer a flexible, orbital space delivery system."
The new company to manage the project, called Stratolaunch Systems, has the slogan "Any orbit. Any time."
Allen, the sole funding source for development, did not say how much he would spend on the project, but indicated it would be $200 million or more, an "order of magnitude" greater than the $20 million he spent backing the first privately funded, manned space flight in 2004.
Fifty-eight-year-old 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.
Allen said he has long harbored space fantasies.
"I dreamed of becoming an astronaut," he said at the company's launch at his offices in downtown Seattle. Poor eyesight ruined his dreams of becoming a pilot, but he said his ambitions for space travel never died.
Initially, Stratolaunch will aim to fly unmanned rockets to put mid-sized satellites into orbit, and perhaps fly cargo to the International Space Station, if permitted.
Since the space shuttle's retirement this summer, the United States is dependent on partner countries to ferry cargo and crew to the outpost, although NASA is investing in some private enterprise options.
After that, Allen's target is to fly paying customers into space, which he said had a massive potential market.
His former Microsoft colleague Charles Simonyi paid about $20 million for a trip aboard Russia's Soyuz spacecraft to the International Space Station, but now the U.S. space shuttle is defunct, the tab could be three times as high.
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 completed a second course of treatment for a different type of cancer, but says he is healthy now.
Allen's interests and investments range far and wide, but are focused on his native Seattle and the Pacific Northwest.
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.