We've created a Video Introduction for linkspank (a "site demo").
Ok, so may it's not the greatest site demo EVER. But I'd put it in the top 95th percentile.
How to make one the way we made this one:
1. Explain what your site is to dozens, hundreds of people, verbally. In doing so, your pitch and explanation will evolve naturally to becoming increasingly effective - and you'll learn what people need to be explicitly told about your idea. Everyone helps you in this step, because you want your idea to be clear to anyone.
2. Create a positioning for your site. This is marketing mumbo-jumbo. People who actually know marketing and don't pooh-pooh the 3C-4P framework are useful for this step.
The reason you need to do this step is that it helps you figure out how to convey your message. Should your demo be slick or goofy? Is having a caveman in it a really dumb idea? Once your positioning is set, it provides the answers magically to all of these questions.
3. Storyboard the demo/video introduction. Pretend you are a cartoonist (even if your demo won't involve animation, as ours does). Long before anyone draws cartoons, they create "storyboards" describing, in excruciating detail, what happens in each "scene" of your demo. If this process sounds too creative to you, remember that you can always do it in Powerpoint.
4. Get a Flash artist/animator to executive your demo. Once you have the storyboard, you can show it to candidates and discuss whether they are the right person for it. In our case, we needed someone who knew flash and who could draw, but e.g. javascript skills were not required.
Notes:
+ This process has creative components - how do you make sure it goes well? The answer is to put as much of the creative work into step #3 by storyboarding everything in exquisite detail. You should let your Flash artist help you improve the idea in step #4, but any gaps in your description are areas of risk going forward.
+ Despite doing our homework, we have no way of being sure at this point how our audience will react to our site demo. But I will say confidently that if your site demo appeals to everyone, and everyone thinks it's unqualifiedly great, then you may have failed to stick to step #3 and maybe you created something too generic.
Just sharing my experiences! Don't forget to share your wisdom back with me ;-).