We've been to Funchal twice, the old town is great for small bars and restaurants. The castle restaurant had a a great wine tasting meal, different wine for each course. The cable car is great and the wooden sledge ride is a must.
The gardens are really good too.
The new town has the big hotels and more touristy bars.
I'd also can recommend the Beer House craft beer. Lovely wheat beer.
Try the poncho drink too.