We don't do live challenges. First interview, we bring the applicant up to speed on what our company does. Our market and products, and then our technology, dev processes & tools. We look for how much they've studied us before they interview, what kind of questions they ask, how are they interpersonally, where are their interests as evidenced by where they spend their time outside of work. If that seems to go well, we send them home with a set of 5 coding tasks. They are to choose one, use their preferred language, and code it. We ask for about 100 lines of code and not to spend more than 2 hours. The tasks are all different, but all of them are directly relevant to the type of software we develop (embedded industrial control systems).
They take as many days as they need, then come back and conduct a code review of their code with our team. This shows us how they approach coding, how they think through problems, how well they communicate their thinking, how much curiosity they have about the their own solution, how they respond to criticism.
We like this approach because it is much more reflective of how developers actually work than white board or academic type testing. It tells us where their intellectual focus is, their level of humility about learning from others. Surprisingly, what they can teach us. We've had young applicants stump 30-year veterans, which was awesome.
So far, we've had nothing but very strong hires with this approach, and the applicants have all said they very much appreciated how we roll.