What is the best way to approach an investor and how should I prepare?

I say a business plan is less important than a slide deck which is less important than your elevator pitch which in turn is less important than an introduction :)

What you need before you approach investors:

a - Get a prototype ready: Start working on your idea before approaching any investors

b - Form the core team, that is you and a co-founder. At least one of you should be the technical wiz. Never outsource your early stage work

c - Launch early, launch often - Don't wait until you are feature complete, try to launch early to gather feedback from users - Track how users are using your product and quickly adapt and fix bugs in the open.

d - Wait until you start gaining momentum - That could be getting a rock star techie to join the team or getting good press coverage, or traffic is growing exponentially, or new major feature. You get it :), basically anything that would get an investor excited to jump on the deal.

How to approach investors:

a - Get an introduction: Angel investors or VCs get tons of emails per day. You need to get on their radar and the best way to do so is to get introduced by a trusted source. That could be one of their portfolio entrepreneurs, friends etc ... To get to them go out-there and network, talk to people both online (twitter, FB etc ...) and offline

b - Elevator pitch, the intro will ensure that the investor will read the email and give it some attention. This is where your elevator pitch kicks in. It should be no longer then 2 or 3 paragraphs, highlight the team, market, solution and some key accomplishments (ex: we reach 200K uniques and are growing at 3x a month - Or we just signed a major client ...)

c - Powerpoint plan, this is a short slide deck that includes among others: team, mission, market, problem, solution, team, competition, sales, revenue model, financial needs and milestones. It should be about 10-15 slides and not heavy on text. One mistake entrepreneurs do here is that they miss the team slide, this is THE most important part in an early stage investment.

d - Business plan Most early stage investors won't ask for it, but basically it's the slide deck fleshed out in text. Don't be too comprehensive as that will probably turn off the VC who doesn't always have the time to read thick texts.

Basically you need to prove your concept and gain some traction before approaching investors. Early stage investors want to see a strong committed team, a large enough market, and a product that has started gaining some sort of traction ...