Indie labels are businesses, and your band has to have something to offer. You cannot count on the dream that some executive will "realize" your potential, stick you in a studio and guide you through the music business. In basic terms, your band needs to be able to draw a crowd to interest most labels. This is done through playing out as much as possible, self-promotion and hard work developing your sound. It's a good idea to make friends with bands that have a similar style, because it's much more attractive for a bar/venue to book a few bands that compliment each other than just one band.
A home recording of your band using a few cheap mics and a computer is fine to show your friends. However, indie labels get demos from multitudes of bands that are all trying to get signed. You bands recording has to stand out as much as possible, and the best way to do that is through professional help. If this means that your band has to scrimp, save up and pawn a t.v. or two in order to buy enough studio time to record three songs, then so be it. The difference between a person who has downloaded a few computer programs to mix/master the songs and an actual professional producer is like a cheeseburger vs. filet mignon. Trust the people that do it for a living and maximize your band's potential. This, by all means, does not mean that you and your band members should not learn as much as possible about the production side of things, because many producers were once in the same position as you.
Like it or not, there is a lot of networking to be done. Don't write off the small or newly started labels in your hometown/city. Even the smallest Indie labels know people people in production companies and people in production companies have ties to venues. This means more shows and, therefore, more opportunity to increase your fan base. A band that is selling out shows and loads of their own t-shirts and CDs is going to attract attention, and the more people that promote your band, the better.
You band should ask itself two basic questions: What is our sound and who is our audience? A punk band is probably not going to generate any interest from Rebel Records, a bluegrass/country indie label. Do the research on all the labels, local and otherwise. Focus your attention on labels that carry artists with similar styles, influences and fans. Some of the more popular indie labels and the bands that they represent are:
Matador Records: Pavement, Yo La Tengo, Sonic Youth and Belle and Sebastian.
Drag City: Silver Jews, U.S. Maple, Death and Monotonix. They specialize in experimental indie music.
Fat Wreck Chords: Nofx, Me First and the Gimme Gimmes, Anti-Flag and Rise Against. Specialize in Punk and Ska bands.
4AD: Bon Iver, The Pixies, Beirut and TV on the Radio. Tends to lean towards folk, but also branches out to experimental.
Just because you get signed to a label does not mean you are going to be rich. In fact, a label may not even be the best decision for your band. For instance, a band that goes gold with a CD (500,000 records sold) on average make about $47,000, while a band that goes gold and puts their albums out themselves can make twice that amount. Finally, never forget that music is hard work and there are no guarantees.